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Author: 


Walker,  Ross  G. 


Title: 


A  classified  selection  of 
problems  in  accounting 

Place: 

Ann  Arbor 

Date: 

[1922] 


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Titers'- *'"»*« 
419 

?oLo«.«r  Walker,  Ross  G. 

A  classified  scloction  of  probloins  in  accounting  (byi 
E.  G.  Walker  ...    Ann  Arbor,  j\[icb.,  G.  Wahr  [^^1922] 

^^-hese^prbbflms  have  been  selected  or  adapted 
largely  from  the  C.  P.  A.   examinations  of  Massac] 
setts.  Hew  York,  Pennsylvania,  Illinois,   and  l^is- 
consin,   and  from  examinations  given  at  the  uni^ 
versity  of  Michigan." 

1.  Accounting — Problems,  exercises,  etc. 


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A  Classified  Selection  of 
Problems  m 
Accounting 

R.  G.  Wa&er 


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A  CLASSIFIED  SELECTION  OF  PROBLEMS 

IN  ACCOUNTING 


R.  G.  WALKER 

Assistant  Professor  of  Accounting 
University  of  Iowa 


: 


GeOBOB  WaHB,  PtTBUSHBB 

Ann  Abbob,  Michigan 


Copyright  ig22  by 

George  Wahr 
Ann  Arbor,  Michigan 


PREFACE 

The  primary  purpose  of  this  collection  of  problems  is  to 
facilitate  instruction  in  accounting  at  the  University  of  Iowa. 

The  problems  have  been  selected  or  adapted  largely  from 
the  C.  P.  A.  examinations  of  Massachusetts,  New  York,  Pennsyl- 
vania, Illinois,  and  Wisconsin,  and  from  examinations  given  at  the 
University  of  Michigan.  A  considerable  number  have  been  origi- 
nated by  the  editor  to  develop  important  theoretical  points  in  the 
class  room.  The  division  of  the  subject  in  accord  with  which  the 
problems  have  been  arranged  is  of  course  not  intended  to  be  ex- 
haustive any  more  than  entirely  accurate.  Nor  is  the  brief  intro- 
duction offered  under  each  head  proposed  as  even  the  barest  out- 
line of  the  difficulties  involved.  Both  the  arrangement  and  the 
discussions  are  meant  to  be  merely  suggestive. 


T 


1 


MILLARD  PRESS 
Ann  Arbor,  Mich. 


PROBLEMS     IN     ACCOUNTING 


11 


COINTENTS 

Page 
Section  I     Deriving  from  single  entry  records  a  statement 
of  business  condition  and  of  profit  and  loss 13 

Section  II  Miscellaneous  problems  and  exercises  in  the 
theory  of  accounts 15 

Section  III     Partnership  accounting 47 

Section  IV     Corporation  accounting 68 

Section  V     Depreciation  accounting 106 

Section  VI    The  Interest  Problem 114 

Section  VII  The  accounting  problem  of  the  pre-operating 
period  and  of  failure  and  dissolution 127 

Section  VIII  Accounting  for  the  holding  company  and 
the  merger 135-148 

Section  IX  Miscellaneous  problems  requiring  special  ap- 
plication of  principles,  as  in  branch  accounting  and  estate 
accounting,  a  few  being  for  purposes  of  general  review.  .152 


SECTION  I.  Deriving  from  Single  Entry  Records  a  State- 
ment of  Business  Condition  and  a  Statement  of  Profit 
and  Loss. 

Single  entry  bookkeeping  has  been  rightly  called  incomplete 
entry  bookkeeping.    It  might  be  defined  as  the  keeping  of  memor- 
anda records  touching  only  particular  aspects  of  but  two  or  three 
types  of  business  transactions.    The  usual  accounts  kept  are  those 
with  cash  and  with  customers'  and  creditors'  balances.    The  short- 
comings of  such  bookkeeping  are  chiefly  two:   failure  to  make 
periodic  provision  for  an  analysis  of  expenses  and  revenues  and 
omission  of  certain  important  asset  and  liability  balances.     The 
inadequacy  of  its  record  necessitates  painstaking  inventorying  of 
assets  and  liabilities  at  the  end  of  the  accounting  period.     No 
matter  how  carefully  the  inventory  is  taken,  however,  the  liability 
always  exists  of  overlooking  some  item  which,  if  included,  would 
materially  affect  the  statement  of  financial  condition.    This  state- 
ment, sometimes  called  in  single  entry  the  "statement  of  condi- 
tion," can  be  nothing  more  than  an  inventoried  balance  sheet; 
and  a  balance  sheet  based  entirely  upon  an  inventory  is  usually 
several  degrees  more  rough  in  its  approximation  to  the  truth 
than  one  which  is  derived  from  a  well-kept  ledger.    And  the  state- 
ment of  profit  and  loss,  if  possible  at  all  with  such  meager 
records  as  afforded  by  single  entry,  can  be  constructed  only  upon 
data  drawn  from  the  cash  receipts  and  disbursements  and  from 
the  balances  of  the  customers'  and  creditors'  accounts  outstanding 
at  the  beginning  and  at  the  end  of  the  period  of  operations. 

Double  entry  differs  from  single  entry  in  the  respect  that  it 
more  or  less  automatically  provides  the  bookkeeper  with  his  peri- 
odic operating  analysis  and  balance  sheet.  An  attempt  is  made 
in  double  entry  to  show  within  the  system  the  two-sided  effect  of 
every  business  transaction.  At  the  end  of  the  bookkeeping  inter- 
val some  inventorying  even  here  is  necessary,  but  it  is  reduced  to 
a  considerable  minimum.  And  the  process  is  expedited  by  the 
presence  of  a  pretty  complete  statement  of  business  happenings 
up  to  the  end  of  the  period.  The  omissions  which  are  made  in  a 
given  easel  are  excusable  on  the  grounds  of  practical  expediency. 
The  following  problems  are  illustrative  of  the  difficulties  pre- 
sented to  the  accountant  by  single  entry  records. 


1 


14 


PROBLEMS    IN    ACCOUNTING 


i 


Problem  1. 

Show  the  profit  or  loss  in  the  following  cases : 

Proprie-    Proprie-   Proprie- 
tor X        tor  Y        tor  Z 

Net  Worth  Jan.  1 20,000        30,000        60,000 

Net  Worth  Dec.  31 60,000        20,000      200,000 

Drawings  During  Year 2,000  1,000        20,000 

New  Investments  During  Year 40,000         5,000 

How  would  the  case  of  concern  Y  be  altered  if  it  were  later 
discovered  that  the  proprietor  had  forgotten  a  business  obliga- 
tion which  he  owed  at  the  bank  amounting  to  $5,000,  together 
with  accrued  interest  of  $150,  and  that  he  also  had  failed  to  in- 
clude among  his  assets  the  value  ($10,000)  of  his  residence? 

Problem  2 

James  White  uses  the  single  entry  method.  On  Jan.  1,  1920 
his  customers'  balances  amounted  to  $10,000  and  his  creditors* 
balances  to  $3,220.  The  balance  of  his  cash  book  was  $1,000,  but 
there  was  a  cash  shortage  of  $100.  Five  hundred  dollars  of  this 
was  in  the  bank.  No  other  records  were  kept.  Upon  inventory- 
ing it  was  found  that  White  had  merchandise  worth  $8,350,  and 
auto  truck  valued  at  $1,000,  furniture  and  fixtures  worth  $800, 
and  a  note  payable  given  to  a  furniture  creditor  for  $100.  On 
December  31,  1917,  White  had  accounts  receivable  of  $10,000; 
he  owed  to  creditors  for  merchandise  the  sum  of  $3,000;  and 
cash  on  hand  was  $500.  Merchandise  was  inventoried  at  $9,000. 
On  a  note  for  $500  due  at  his  bank  he  owed  $10  accrued  interest. 
It  was  considered  that  the  auto  truck  had  depreciated  20%. 
White's  drawings  had  amounted  to  $1,000,  and  he  had  reinvested 
$500. 

Compute  the  profit  and  loss  by  the  so-called  single  entry 
method  of  subtracting  the  net  worth  at  the  end  of  the  year  from 
the  net  worth  at  the  beginning,  being  sure  that  you  consider  that 
difference  only  as  affected  by  actual  business  operation. 

Derive  a  "double  entry"  analysis  of  profit  and  loss  with  the 
aid  of  the  following  information : 


% 


PROBLEMS    IN    ACCOUNTING  15 

Summary  of  receipts  and  disbursements  for  the  year: 

Received: 

Accounts    Receivable $19,710 

New  Investment 500 

Loan  at  Bank 500 

Disbursed: 

Creditor's  Note  100 

Accounts  Payable   15,000 

General  Expense 4,000 

Wages  1,000 

Drawings    1,000 

Interest   10 

SECTION  II.    Problems  and  Exercises  In  the  General  The- 
ory of  Accounting. 

The  student  is  referred  to  Sprague's  "Philosophy  of  Ac- 
counts" and  to  Paton's  book  on  the  theory  of  accounts  for  good 
sources.  The  latter  study  is  a  serious  and  comprehensive  one, 
and  is  quite  up-to-date  in  its  analysis.  Hatfield's  "Modern  Ac- 
counting" gives  a  rather  impartial  approach  to  the  chief  difficul- 
ties of  accounting,  but  perhaps  stops  short  of  what  one  might 
term  extended  theoretical  discussion.  The  student  will  do  well  to 
take  time  off  for  serious  reference  to  books  of  the  above  charac- 
ter. 

Problem  3 

A  partnership  of  X,  Y,  and  Z  has  on  January  1,  1920  an 
auto  truck  worth  $2,000,  merchandise  valued  at  $9,000,  furniture 
and  fixtures  worth  $500,  and  accounts  receivable  amounting  to 
$15,000.  Cash  on  hand  is  $3,000.  Outstanding  creditors'  balances 
total  $4,000.  Both  partners  originally  contributed  capital  on  an 
equal  basis,  and  withdrawals  by  both  partners  have  been  equal. 

On  December  31  of  the  same  year  the  assets  were  as  follows : 
Accounts  receivable  $25,000,  cash  $3,000,  merchandise  $10,000, 


16 


PROBLEMS     IN    ACCOUNTING 


and  the  fixed  assets  the  original  balances  less  10%  depreciation  on 
furniture  and  fixtures  and  25%  depreciation  on  the  truck.  Cred- 
itors' balances  are  $2,500.  The  books  have  been  kept  in  an  in- 
complete manner,  only  amounts  for  cash  and  customers'  and  cred- 
itors' balances  being  available.  The  drawings  of  the  partners 
have  been  $2,000  apiece. 

Show  the  profit  for  the  year,  and  give  the  entries  in  a  double 
entry  journal  requisite  to  change  the  bookkeeping  plan  to  the  reg- 
ular double  entry  basis. 

Problem  4 

Explain  the  inadequacy  of  the  so-called  single  entry  plan  of 
keeping  business  records.  (First  show  what  we  mean  ordinarily 
by  adequate  records  and  how  double  entry  provides  for  them.) 

Problem  5 

The  Jackson-Dayton  Company  record  their  merchandise 
transactions  in  a  single  merchandise  account.  What  is  this  kind 
of  an  account  called?  Why?  At  the  end  of  one  of  their  ac- 
counting periods  it  shows  a  credit  balance  of  $40,320.  If  their 
merchandise  inventory  amounts  to  $40,023,  what  is  the  amount  of 
their  gross  revenue  from  sales  ?  Explain  precisely  the  importance 
of  this  gross  revenue  from  sales  figure. 

Problem  6 

Explain  precisely  the  construction  of  the  balance  sheet.  How 
does  it  differ,  if  at  all,  from  the  so-called  "trial  balance  after  ad- 
justments?" From  the  "trial  balance  before  closing?"  Expound 
the  statement  that  "the  balance  sheet  is  the  origin  and  terminus  of 
every  account,"  or  "that  the  balance  sheet  is  the  groundwork  of 
accountancy." 

Problem  7 

It  has  been  said  that  there  are  two  methods  of  arriving  at  the 
balance  sheet :  by  derivation  and  by  inventory.  Explain  what  is 
meant. 


PROBLEMS    IN    ACCOUNTING 


17 


Problem  8 

How  does  the  controlling  account  make  possible  the  two 
principal  types  of  information  required  by  a  business  man,  namely, 
comprehensive  and  detailed  information? 

Problem  9 

(a)  Define  an  offset  and  an  adjunct  account.  Illustrate 
their  uses. 

(b)  Explain  the  construction  of  the  expense  and  revenue 
accounts,  and  the  reason  for  their  use. 

(c)  At  the  end  of  an  accounting  period  what  are  the  accounts 
which  we  usually  find  in  the  general  ledger  having  debit  balances  ? 
Having  credit  balances  ? 

(d)  What  adjustments,  ordinarily  necessary  at  the  end  of  an 
accounting  period,  must  be  made  to  render  the  trial  balance  a 
correct  basis  for  the  operating  analysis  and  the  balance  sheet? 

Problem  10 

Define  the  accounting  period.  Why  do  we  try  to  "preserve 
the  integrity"  of  the  accounting  period?  Explain  the  distinction 
between  the  figure  of  net  operating  revenue  and  the  figure  of  net 
profit. 

Problem  11 

What  do  we  mean  when  we  say  we  keep  books  from  the  stand- 
point of  the  manager?  What  kind  of  accounting  data  is  indis- 
pensable to  the  manager  ? 

Problem  12 

From  the  following  figures  of  net  sales,  costs,  and  expenses 
prepare  a  statement  which  will  account  for  the  shrinkage  in  profits 
in  1920,  and  which  will  show  in  dollars  and  cents  what  portion  of 
the  shrinkage  is  due  to  decreased  sales  and  what  portion  is  oc- 
casioned by  the  several  variations  in  cost  and  expense  items. 


18 


PROBLEMS    IN    ACCOUNTING 


1920  1919 

Materials $230,000  $250,000 

Direct  Labor 80,000  108,000 

Indirect  Labor   6,000  8,000 

Factory  Expennes   27,000  26,500 

Trading  Expenses   23,500  21,000 

Office  Expenses   10,500  11,500 

Net  Sales    390,000  465,000 


Problem  13 

The  books  of  a  manufacturing  company  at  the  close  of  its  first 
year's  business  show  sales  of  $250,000 ;  returns  and  allowances  of 
$20,000 ;  merchandise  cash  discounts  debit  of  $15,000 ;  merchan- 
dise debit  balance  of  $70,000 ;  labor  $50,000 ;  fuel  $16,000 ;  shop 
expense  $20,000;  salaries  $16,000;  general  expense  $8,000;  ad- 
vertising $55,000 ;  traveling  expenses  $5,000 ;  insurance  and  taxes 
$6,000.  The  inventory  totals  $14,000,  and  before  the  books  are 
closed  a  sufficient  sum  for  depreciation,  namely  $5,000,  is  written 
off. 

The  company  claims  that  its  profit  figure,  conservatively 
stated,  is  $22,000.  Arrange  the  amounts  in  an  income  account 
and  explain  how  the  company  could  arrive  at  such  a  profit.  The 
figures  are  supposed  to  be  accurate. 

Problem  14 

(a)  The  X  Company  issues  20-year  bonds  at  par  to  the 
amount  of  $1,000,000.  The  bond  contract  requires  the  Company 
to  accumulate  a  sinking  fund  "out  of  profits'*  with  which  to  re- 
tire the  bonds  at  maturity.  This  fund  is  to  be  established  with  the 
Y  Trust  Company,  to  be  used  by  the  trustee  in  paying  the  bond- 
holders. 

Ignoring  interest  give  the  entries  required  by  this  contract  the 
first  year.  Give  the  entries  which  would  be  made  when  the  bonds 
mature. 


PROBLEMS    IN    ACCOUNTING  19 

(b)  Give  journal  entries  which  might  reasonably  explain  the 
change  between  years  in  the  following  taken  from  the  X  Com- 
pany's balance  sheet  prepared  December  31  for  each  of  the  years 

named. 

1920  1921 

Reserve  for  Federal  Taxes $  50,000  $  60,000 

Reserve  for  Depreciation 160,000  180,000 

Reserve  for  Doubtful  Accounts 3,000  2,500 

Reserve   for  Improvements 50,000  75,000 

Reserve   for   Contingencies 25,000  50,000 

Problem  15 

Mr.  A,  single  proprietor,  writes  you  a  request  to  come  to  his 
place  of  business  for  the  purpose  of  getting  out  his  yearly  financial 
statements.  Having  consented  to  go,  you  set  out  for  Mr.  A's  office. 
Before  you  arrive  fire  breaks  out  in  Mr.  A's  office  and  destroys 
every  accounting  record  the  proprietor  ever  possessed.  Explain 
how  you  would  set  about  the  task  of  supplying  Mr.  A  with  the 
statements  he  requires.  Would  it  be  possible  for  you  to  give  all 
he  asks?  Assuming  he  remembers  his  net  worth  as  of  the  end  of 
the  preceding  period,  could  you  tell  him  his  profits  for  the  period 
just  passed?  Can  you  explain  why  the  results  would  be  at  best 
but  a  rough  approximation  of  the  truth?  Of  what  valuable  in- 
information  would  Mr.  A  find  himself  lacking.    Discuss  generally. 

Problem  16 

The  principal  objects  of  a  corporation  were  to  buy,  rent,  and 
sell  land.  The  articles  of  incorporation  provided  that  dividends 
should  be  paid  only  out  of  net  profits.  In  1881  the  company  had 
a  worthless  debt  of  $350,000  which  it  undertook  to  absorb  by 
writing  up  in  the  balance  sheet  of  that  year  the  value  of  its  lands 
some  $340,000  above  cost  price,  crediting  such  increase  of  value  to 
profit  and  loss  as  a  set-off  against  the  bad  account  which  was  in 
this  way  treated  as  written  off.    Was  this  legitimate  accounting? 

In  1885  the  same  company  showed  a  profit  by  its  revenue 
accounts,  out  of  which  the  payment  of  a  dividend  on  preferred 


<  ! 


20  PROBLEMS     IN    ACCOUNTING 

stock  was  proposed.  A  common  shareholder  brought  suit  to  re- 
strain the  payment  of  the  proposed  dividend  on  the  ground  that 
some  of  the  company's  land  had,  during  the  year  1885,  much  de- 
clined in  value,  and  that  if  such  loss  of  value  were  debited  to  the 
profit  and  loss  account  there  would  be  no  surplus  available  for 
dividends.    Was  the  ground  for  action  a  good  one? 

Problem  17 

From  the  following  trial  balance  before  closing,  and  adjusting 
data,  of  the  Passe  Corporation,  prepare  a  profit  and  loss  state- 
ment and  surplus  analysis  as  of  December  31,  1921,  using  the  re- 
port form  method  of  presentation : 

Account  Dr.                  Cr. 

Plant,  Machinery,  etc., $1,000,000 

Goods  in  Process  Inv.  Jan.  1,  1921 90,000 

Materials  Inv.  Jan.  1,  1921 100,000 

Finished  Goods  Inv.  Jan.  1,  1921 50,000 

Accounts  and  Notes  Payable $      65,000 

Direct  Labor 75,000 

Bonds  200,000 

Manufacturing  Expense 30,000 

Net  Purchases    500,000 

Selling  Expenses   20,000 

Accounts  and  Notes  Receivable  200,000 

Cash  25,000 

Net  Sales 640,000 

Administration  Expense  10,000 

Interest  Paid  5,000 

Capital  Stock  1,000,000 

Surplus 200,000 


PROBLEMS     IN     ACCOUNTING 


81 


$2,105,000        $2,105,000 

No  dividends  were  declared  during  1921;  the  company  has 
failed  to  charge  operations  with  depreciation  on  the  plant  since 
purchased  at  the  beginning  of  business  five  years  ago,  5  per  cent 


per  annum  being  the  correct  amount  for  this  type  of  property; 
inventories :  December  31,  1921 :  raw  materials,  $70,000 ;  goods  in 
process,  $5,000,  and  finished  goods,  $40,000 ;  direct  wages  unpaid 
$5,000. 

Make  up  a  working  sheet  to  hand  in  with  your  reports. 

Problem  18 

A  certain  corporation  established  January  1,  1919,  closes  its 
books  at  the  end  of  the  half-year  period.  At  the  time  of  your 
audit,  just  following  the  closing  of  the  books  December  31,  1921, 
you  find  in  the  general  ledger  a  buildings  account  with  a  debit  of 
$100,000  purporting  to  be  the  cost  (new)  of  the  plant  structure, 
offset  by  an  allowance  for  depreciation  account  with  a  credit  bal- 
ance of  $20,000.  You  ascertain  that  the  original  program  for 
writing  off  depreciation  provided  for  building  up  of  the  allowance 
at  a  rate  based  on  a  service  life  of  the  property  estimated  to  be 
20  years,  no  salvage  value  expected,  each  year  to  bear  accordingly 
its  aliquot  share  of  the  capital  expiration.  Such  a  discovery  gives 
evidence  that  the  bookkeeper  has  misunderstood  the  instructions 
given  him  when  the  asset  was  purchased.  Formulate  the  adjusting 
journal  entries,  with  explanations. 

Problem  19 

Corporation  X,  engaged  in  the  manufacture  of  spark  plugs, 
possesses  unimproved  real  estate  which  cost  $320,000,  purchased 
with  a  view  to  expanding  its  plant  on  the  one-story  plan.  Property 
in  the  vicinity  has  risen  rapidly  in  value,  and  the  board  of  direc- 
tors decided  that  it  would  be  the  better  part  of  thrift  for  the  com- 
pany to  expand  its  facilities  by  adding  new  stories  to  already  exist- 
ing structures,  and  to  dispose  of  the  real  estate.  The  property  is 
accordingly  sold,  the  sale  realizing  $500,000.  Journalize,  giving 
reasons. 

A  real  estate  organization  purchases  the  land  from  the  X 
Corporation,  and  eventually  sells  the  property  by  lots  for  $1,000,- 
000.    Journalize,  giving  reasons. 


I 


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ill 


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22  PROBLEMS     IN     ACCOUNTING 

Explain  why  you  accord  different  treatment  to  the  two  tran- 
sactions, since  the  same  piece  of  property  is  dealt  with  in  both  in- 
stances. 

Problem  20 

On  February  15,  1920,  the  directors  of  a  corporation  with 
$10,000  Cumulative  6  per  cent  preferred  stock  and  $10,000  com- 
mon stock,  present  to  their  stockholders  their  regular  annual  re- 
port including 

Exhibit  A,  statement  of  assets  and  liabilities  at  December  31, 
1919. 

Exhibit  B,  statement  of  receipts  and  disbursements  for  the 
year  ending  December  31, 1919. 

A  letter  discussing  the  affairs  of  the  company. 

In  this  letter  the  directors  state :  "Exhibit  B  shows  a  gain  of 
$1253.50,  increasing  the  balance  from  $590.00  at  the  beginning 
of  the  year  to  $1843.50  at  the  end  of  the  year.  As  you  will  re- 
member, it  was  impossible  to  pay  any  dividends  last  year  because 
the  $590.00  balance  was  insufficient  to  pay  6  per  cent  on  the  pre- 
ferred. This  left  the  preferred  dividends  one  year  in  arrears. 
The  gain  of  $1253.50  this  year  enables  us  to  pay  last  year's  pre- 
ferred dividend  of  $600.00,  as  well  as  this  year's  dividend  on  the 
preferred,  or  $1200  altogether.  As  this  uses  all  but  $53.50  of  the 
year's  gain  it  is  impossible  to  pay  any  dividend  on  the  common 
stock." 

A  committee  of  common  stockholders  waited  on  the  directors 
and  strongly  urged  the  payment  of  a  6  per  cent  dividend  on  the 
common  stock,  supporting  their  petition  with  the  following  figures : 

Balance  at  beginning  of  1919 590.00 

Increase  during  1919,  as  shown  by  Exhibit  B. .  .1253.50 

Balance  at  the  end  of  1919 1843.50 

Dividends  on  preferred  stock 1200.00 

Balance  available  for  common  stock 643.50 

A  6  per  cent  dividend  on  the  common  stock 600.00 

Would  still  leave  a  balance  of 43.60 


PROBLEMS     IN     ACCOUNTING 


23 


The  directors  maintain  that  the  dividends  for  the  year  can- 
not legally  exceed  $1253.50  and  that  the  cumulative  feature  of 
the  preferred  stock  requires  that  $1200.00  thereof  must  go  to  the 
preferred.  You  are  asked  to  write  a  letter  to  the  directors  ad- 
vising them  the  proper  course  to  follow.    Make  it  brief. 

Problem  21 

The  statement  of  condition  of  a  certain  institution  at  the 
close  of  business  December  31,  1913,  which  had  been  prepared  by 
an  accountant,  appeared  as  follows : 

Liabilities 


Assets 

Cash    $30,344.94 

Acc'ts  Rec.  for 
Food 44.39 

Accrued  Interest. . .        500.00 

Office  Supplies 6.85 

Sundry  Food  Sup- 
plies          1,226.72 

Investments  at 
Cost     10,095.00 

Furniture  and  Fix- 
tures            300.00 


Accounts  Payable: 

Office  Supplies  ....$  2.00 

Food  Supplies  ....  480.00 

Nurses'  Salaries  . . .  680.50 
Laundry  and 

Cleaning 28.0(1 


Total  $  1,190.50 

Notes  Payable  ....     5,000.00 
Surplus   36,327.40 


$42,517.90 


$42,517.90 


The  accounts  included  in  the  foregoing  statement  of  condi- 
tion are,  with  the  exception  of  cash,  not  incorporated  in  any  of  the 
books  of  the  organization,  since  the  only  record  kept  is  a  cash 
receipts  and  disbursements  book. 

You  were  instructed  to  audit  the  cash  book  for  the  year 
ended  December  31,  1914.  You  found  the  cash  receipts  and  dis- 
bursements for  the  year  to  be  made  up  as  follows : 

RECEIPTS : 

Contributions $25,330.68 

Special  Campaign 6,800.00 


r 


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i 


24  PROBLEMS     IN     ACCOUNTING 

Sale  of  Food  Supplies 1,352.32 

Bank  Loan   10,500.00 

Sub-rentals   77.00 

Interest  on  Investments  850.00 

Bond  Sold,  including  accrued  Interest  of  $25.00. . .  5,010.00 

Total  Receipts   49,920.00 

DISBURSEMENTS: 

Station  Expenses  $  6,103.76 

Food   Supplies    1,821.00 

General  Expenses 12,262.20 

Loan  Repaid  5,000.00 

Interest    638.50 

Office  Supplies  15.00 

Nurses'  Salaries  19,820.00 

Laundry  and  Cleaning   720.00 

Bonds  purchased  at  cost , 28,020.00 

Interest  accrued  on  above  Bonds  215.00 

Total  Disbursements   $74,615.46 

From  the  information  available  at  the  close  of  your  examin- 
ation you  ascertain  the  following  facts : 

Accounts  Receivable  for  food  amounted  to $  58.20 

Accrued  Interest  on  Investments  amounted  to 756.00 

Office  Supplies  inventory  amounted  to  10.00 

Food  Supplies  inventory  amounted  to 926.50 

The  original  cost  of  the  Bond  sold  during  the  year  was  .  4,965.00 

Unpaid  invoices  for  Food  Supplies 360.20 

Nurses'  Salaries  unpaid 923.50 

You  are  required  to  prepare  a  revenue  and  expense  statement 
for  the  year  ended  December  31,  1914,  and  a  statement  of  condi- 
tion at  the  close  of  the  year. 


PROBLEMS     IN    ACCOUNTING 


25 


Problem  22 

On  July  1,  1916,  the  X.  Y.  Z.  Co.  borrowed  on  their  notes, 
$4,500,000  to  be  paid  back  as  follows :  $500,000  due  July  1,  1917 ; 
$500,000  due  July  1,  1918;  $500,000  due  July  1,  1919;  $500,000 
due  July  1, 1920 ;  $2,500,000  due  July  1, 1921. 

In  addition  to  5%  interest  on  the  notes,  payable  semi-annually, 
the  bankers  deducted  3%  discount  on  the  $4,500,000.  The  com- 
pany wishes  to  write  off  this  discount  proportionately  at  the  end 
of  each  year. 

How  much  should  be  written  off  on  December  31,  1916, 1917, 
1918,  1919,  1920,  1921?  Use  the  Bonds  Outstanding  Method. 
(By  this  method  the  amount  of  discount  is  accumulated  in  the 
same  ratio  as  the  bonds  retired  each  year  bear  to  total  bonds  out- 
standing at  the  beginning.) 

Problem  23 

Distinguish  between  a  statement  of  receipts  and  disburse- 
ments and  a  statement  of  revenues  and  expenses.  Under  what 
circumstances  would  the  two  statements  be  equivalent? 

Problem  24 

After  having  conducted  his  business  as  a  wholesale  coal 
dealer  for  one  year,  and  having  kept  only  single  entry  accounts, 
a  proprietor  employs  you  to  place  his  books  in  condition  to  be 
kept  according  to  the  double  entry  plan.  You  find  only  a  cash 
book,  a  day  book,  and  a  ledger.  Outline  how  you  would  set 
about  making  a  profit  and  loss  account  for  the  year  ended  and  a 
balance  sheet,  and  how  you  would  make  provision  for  the  double 
entry  system  required. 

Problem  25 

State  your  objections,  if  you  have  any,  to  the  "Merchandise*' 
account  frequently  appearing  in  ledgers.  Describe  a  different 
method  of  recording  the  transactions  affecting  merchandise. 


26  PROBLEMS     IN    ACCOUNTING 

Problem  26 

The  books  of  a  manufacturing  concern,  which  began  business 
January  1,  1912,  were  kept  by  single  entry. 

After  the  close  of  the  second  year  you  are  called  in  to  prepare 
a  comparative  statement,  showing  the  financial  condition  as  at 
December  31, 1912,  and  December  31,  1913.  The  following  mfor- 
mation  is  handed  you  from  which  you  will  draw  your  conclusions : 

Statement  as  of  December  31,  1912 
(Prepared  by  the  Bookkeeper) 

Manufacturing  expense $5,384.25 

Capital  stock,  fully  paid 15,000.00 

Plant  and  equipment 20,000.00 

Cash   3,645.15 

Gross  sales  for  year 11,236.15 

First  mortgage  bonds  (due  Dec.  31,  1913) 15,000.00 

Materials  and  supplies  (inventory) 4,563.84 

Notes  payable 7,500.00 

Accounts  Receivable 6,125.36 

Accounts  payable 2,936.43 

Interest  on  bonds  (9  months),  accrued 562.50 

Interest  on  notes  and  accounts  payable,  accrued 326.50 

During  the  year  1913  there  has  been  subscribed,  and  paid  in 
cash,  $5,000  in  additional  capital  stock.  All  the  notes  and  old 
accounts  payable  have  been  paid,  together  with  the  interest  accrued 
as  above. 

The  plant  and  equipment  were  revalued  in  January,  1913,  at 
$17,500.  Of  this  amount  you  are  instructed  to  charge  off  6% 
for  depreciation,  and  carry  2^2%  to  reserve,  to  cover  repairs  and 
renewals. 

The  outstanding  bonds  were  paid,  both  principal  and  interest, 
when  due. 

The  accounts  payable  (all  for  materials  and  supplies)  at 
December  31,  1913,  amounted  to  $1,146.34,  none  bearing  interest. 


PROBLEMS     IN    ACCOUNTING 


27 


No  inventory  was  prepared  on  December  31,  1913.  The  pur- 
chases during  the  year  1913,  all  paid  for  in  cash,  amounted  to 
$10,396.42.  The  sales  during  the  year  were  $28,726.50,  of  which 
10%  are  still  uncollected  and  considered  good.  The  management 
considers  the  gross  profit  to  be  50%  of  sales. 

Of  the  accounts  receivable  January  1,  1913,  $5,496.43  was 
collected,  and  the  balance  you  are  instructed  to  charge  off. 

Prepare  the  required  statement. 

Problem  27 

The  Rex  Manufacturing  Company  has  its  cost  accounting  de- 
partment at  its  factory,  several  miles  from  the  main  office.  The 
product  of  the  factory  is  charged  to  the  main  office  at  factory 

cost. 

At  January  1,  1913,  the  factory  books  show  the  following 
facts:  Petty  cash  fund,  $500 ;  raw  materials,  $15,283.46 ;  accrued 
wages  distributed,  $1,846.93 ;  goods  in  process,  at  cost,  $56,834.63, 
exclusive  of  general  expenses,  $9,732.65,  and  management  ex- 
penses, $7,834.50;  finished  goods,  $39,864.70. 

Purchases  of  raw  materials  for  the  year  1913  amounted  to 
$71,025.45 ;  wages  paid,  $118,342.63 ;  management  expenses,  $46,- 
835;  factory  expenses,  $30,846.18. 

The  top  floor  of  the  factory  is  rented  to  another  concern  at 
$1,000  a  year,  which  has  been  paid  to  date.  Power  is  sold  to  the 
same  concern  at  $25  per  month,  one  month  being  unpaid. 

Raw  material  used  during  the  year  amounted  to  $58,943.66 ; 
factory  expenses  distributed,  $38,241.16;  management  expenses 
distributed,  $49,637.45. 

The  output  of  finished  goods  for  the  year  amounted  to  $289,- 
864.38,  including  all  costs.  The  goods  charged  to  the  main  office 
amounted  to  $301,286.50. 

At  December  31,  1913,  there  remained  unpaid,  and  undis- 
tributed to  manufacturing,  the  factory  payroll  for  three  days, 
amounting  to  $2,394.84,  and  1,200  hours  of  overtime  (the  regular 
rate  being  42 J^  cents),  payable  at  150%  of  regular  rates. 

Prepare  all  accounts  affected  and  final  trial  balance. 


'%■ 


28 


PROBLEMS    IN    ACCOUNTING 


II 


Problem  28 

Explain  why,  in  the  following  accounts,  the  charge  to  factory 
cost  is  less  than  the  sum  of  credits  to  the  component  accounts, 
excluding  inventory  adjustments: 


Raw  Materials 


100,000 
5,000 


Labor 


150,000 


10,000 


Inv.    10,000 

5,000 

80,000 

10,000 

3,000 

1,000 

500 

100,000 

5,500 

60,000 


Manufacturing  Expense 


30,000 
2,000 
2,500 
5,500 
4,500 

40,000 
40,000 

5,000 

100,000 

45,000 

500 

10,000 

9,500 
20,000 
10,000 


Inv. 


5,000 

9,500 

15,000 

15,000 


Factory  Cost 


PROBLEMS     IN     ACCOUNTING 


29 


Problem  29 

You  are  engaged  to  devise  and  install  a  system  of  cost  ac- 
counts for  a  concern  producing  electrical  machinery,  which  pur- 
chases all  of  its  castings.  Briefly  outline  a  system  of  stores  ac- 
counts, giving  proper  control,  and  draft  the  monthly  journal  en- 
tries affecting  these  accounts. 

State  also  particularly  how  you  would  advise  tjhe  following 
items  to  be  treated  in  determining  costs,  and  give  your  reasons: 
labor  assembling  and  building  machine  for  trial  test ;  labor  disman- 
tling and  packing  machine  for  delivery;  rent  of  buildings;  ma- 
chine labor;  machine  repairs  and  supplies;  depreciation  of  ma- 
chinery ;  storeman's  wages ;  salesman's  salaries  and  expenses ;  and 
foreman's  wages. 

Problem  30 

What  are  the  usual  sinking  fund  provisions  to  be  found  in 
a  trust  deed  securing  an  issue  of  bonds  of  a  corporation?  Sketch 
in  journal  entry  form,  with  proper  descriptions,  the  entries  you 
would  expect  to  find  in  the  accounts  relative  thereto. 

Problem  31 

(a)  Expound  the  theory  of  double  entry  bookkeeping,  and 
state  briefly  how  you  would  proceed  to  complete  the  double  entry 
in  the  event  you  were  called  upon  to  examine  the  accounts  of  a 
concern  which  had  been  kept  on  a  single  entry  basis. 

(b)  Give  some  of  the  meanings  which  have  been  attached  to 
the  terms  "debit"  and  "credit." 

Problem  32 

A  company  issues  an  order  for  material.  From  that  point 
on,  recite  the  accounting  operations  which  relate  to  the  purchase 
of  the  material,  and  which  a  well-organized  concern  would  employ 
to  safeguard  its  interests  until  the  bill  is  paid. 

Problem  33 

(a)  What  do  you  understand  by  the  "Double  Account  Sys- 
tem," and  state  the  kind  of  public  corporations  it  would  especially 
apply  to?     Describe  fully,  giving  illustration. 


%'}i 


30 


PROBLEMS     IN    ACCOUNTING 


I 


(b)  Give  your  understanding  of  good  will.  How  should 
it  be  treated  in  the  accounts?  Illustrate  the  circumstances  under 
which  good  will  comes  up  for  consideration.  Can  you  say  that 
good  will  is  the  result  of  commodity  or  capitalistic  monopoly? 
Define  as  carefully  as  you  can. 

Problem  34 

Suppose  that  Mexican  exchange  has  fallen  considerably 
during  the  last  year  or  so.  What  effect  would  this  fall  have  upon 
the  accounts  of  an  American  company  with  its  head  office  in 
Hickory  Corners  which  does  business  in  Mexico  through  a  local 
branch  office? 

Also  describe  fully  the  effect  of  such  a  fall  in  exchange  in 
the  accounts  of  two  American  companies  with  head  offices  in  the 
United  States,  of  which  one  operates  a  gold  mine  in  Mexico,  ship- 
ping all  its  product  to  New  York,  where  the  metal  is  sold,  and  the 
other  operating  a  local  electric  light  and  power  plant  in  the  re- 
public, buying  all  its  materials  and  supplies  in  the  United  States ; 
and  state  how  the  matter  should  be  dealt  with  in  the  accounts 
of  the  respective  companies. 

Problem  35 

Characterize  the  different  kinds  of  reserves,  first  defining  the 
term  reserve.    Illustrate  each  one. 

Wherein  do  secret  reserves  differ  from  ordinary  reserves? 
How  are  such  reserves  created,  and  for  what  purposes  ?  Give  sev- 
eral examples. 

Problem  36 

Define  the  following  terms:  Depreciation,  depletion,  appre- 
ciation, amortization,  accumulation,  demurrage,  income  bonds,  de- 
bentures, deferred  charges,  capital  expenditures,  sinking  fund, 
expenditure,  expense,  revenue,  gross  profit. 

Problem  37 

The  X.  Y.  Z.  Company  was  formed  on  January  1,  1920,  and 
the  following  is  the  trial  balance  as  of  December  31,  1921,  before 
closing  the  income  and  expense  accounts  for  the  current  year : 


PROBLEMS    IN    ACCOUNTING 


31 


THE  Z.  Y.  Z.  COMPANY 
Trial  Balance,  December  31,  1921 

Dr. 
Capital  Stock  Authorized  and  Issued . . . 
Bonds  Issued: 

$130,000    20-year    h%    bonds,   issued 
January  1, 1920,  at  a  discount  of  5% 

Discount  on  Bonds  Issued $     6,000.00 

Property  (Jan.  1,  1921) 250,280.50 

Capital  Stock  in  Treasury 12,000.00 

Calls  unpaid   500.00 

Additions  to  property,  1921: 

Sinking  Artesian  Well 5,000.00 

X.  Y.  C.  Estate  Co. : 

Bonds      purchased,      1920 

(and  cancelled)    $6,000.00  5,580.00 

Bonds  Purchased  1921....   6,000.00  5,750.00 

Rents  collected   

Fire   Insurance   paid    for   year   ending 

June  30,  1914 300.00 

Agents'  Fees  and  Expenses 2,850.00 

General  Offices  Expenses 1,050.00 

Cash  at  bankers  and  on  hand 1,389.50 

Secretary's  Salary  and  Commission 2,380.00 

Income  and  Expense  Account,  1 920 

Interest  on  bonds  (paid  annually) 5,400.00 


Cr. 
$140,000.00 


120,000.00 


24,500.00 


14,250.00 


$298,750.00     $298,750.00 

The  rent  collections  include  rents  paid  in  advance — $750 — and 
there  are  sundry  rents  outstanding  not  taken  up  on  the  books, 
amounting  to  $2,650,  of  which  it  is  estimated  $15  will  not  be 
collected. 

No  provision  has  been  made  in  the  year's  accounts  for  depre- 
ciation of  the  buildings  included  in  the  property  account,  the 
original  cost  of  which  was  $120,000.  In  the  year  1920  the  amount 
written  off  was  based  on  an  estimated  life  of  twenty  years. 


32  PROBLEMS     IN     ACCOUNTING 

Prepare  balance  sheet  as  of  December  31,  1921,  and  income 
and  expense  account  for  the  year  ended  at  that  date,  after  making 
all  necessary  adjustments. 

Problem  38 

The  Cayuga  Mining  Company  leases  an  iron  mine  from 
X.  Drexel  for  a  term  of  thirty  years,  at  a  rental  to  be  based  on 
a  royalty  charge  of  25  cents  per  ton  of  ore  mined,  with  a  minimum 
or  dead  rent  of  $8,000  per  annum.  The  lease  provided  that  the 
lessee  should  have  the  right  to  recover  dead  rents  paid  in  excess 
of  royalties  earned  within  the  next  succeeding  five  years.  From 
the  following  information  in  regard  to  the  ore  mined,  prepare 
the  account  of  the  lessor  as  it  should  appear  on  the  books  of  the 
lessee  company,  and  in  addition  show  the  "nominal"  accounts 
affected. 

Tons 

Year  Ore  Mined 

1907  10,200 

1908  15,160 

1909  50,280 

1910  35,340 

1911  30,180 

1912  50,240 

1913  36,400 

1914  60,260 

Problem  39 

On  October  31,  1913,  a  fire  occurred  at  the  plant  of  a  furni- 
ture manufacturing  company,  which  destroyed  part  of  the  equip- 
ment, a  large  portion  of  the  stock,  and  one  of  the  accounts  re- 
ceivable ledgers.  A  claim  under  the  company's  policies  of  insur- 
ance of  $250,000  was  filed,  which  was  ultimately  settled  by  the 
adjusters  on  December  1,  1913,  for  $250,000,  which  was  paid  in 
cash,  the  company  to  retain  all  the  salvage.  The  following  is  a 
summary  of  the  book  value  of  the  assets  destroyed  or  lost : 


PROBLEMS     IN     ACCOUNTING  33 

Equipment $  75,000.00 

Merchandise  100,000.00 

Accounts  Receivable 80,000.00 

At  December  31,  1913,  when  closing  the  books  for  the  fiscal 

year  it  was  estimated  that  the  salvage  and  the  book  debts  would 

realize  $90,000,  as  follows: 

Equipment  $15,000.00 

Merchandise  25,000.00 

Book  Debts 50,000.00 

(a)  Draw  up  a  fire  loss  adjustment  account  and  show  the 
profit  or  loss  resulting  from  the  fire,  stating  how  you  would  treat 
it  in  the  annual  accounts  at  December  31,  1913.  State  also  what 
steps  you  would  take  to  verify  the  salvage  values  placed  on  the 
various  items  for  the  purposes  of  the  balance  sheet  of  that  date. 

(b)  During  the  year  succeeding  that  of  the  fire,  in  1914,  it 
turned  out  that  the  estimated  salvage  value  of  the  stock  had  been 
excesssive,  and  that  only  $20,000.00  was  realized  thereon,  while 
the  book  debts  proved  to  have  been  undervalued,  actually  pro- 
ducing $70,000.00.  How  would  you  deal  with  these  differences 
in  the  1914  accounts  ? 


Problem  40 

A  banking  concern  deals  in  foreign  exchange  and  the  follow- 
ing are  the  transactions  with  a  London  correspondent  for  one 
month : 

Debits 

Sept.    1     Remittance  30-Day  Bill  £400  @ 4.86 

10    Remittance  Sight  Bill  ilOO-10-0  @ 4.87 

15    Remittance  Demand  Bill  £200-0-6  @ 4.86 J4 

Credits 

Sept.    2    Draft,  Sight,  £300  @ 4.87^ 

12     Draft,  Demand,  £200-12-5  @ 4.87 

20    Cable,  £100  @ 4.88 

(a)  Ascertain  the  profit  or  loss  in  the  account  for  the 
month. 


III 


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34  PROBLEMS    IN    ACCOUNTING 

(b)  State  the  balance  of  the  account  at  the  end  of  the  month 
in  foreign  and  domestic  currency,  the  current  rate  of  sterling  ex- 
change being  cable  transfers  4.89. 

Problem  41 

Following  is  the  trial  balance  of  a  general  ledger  Decem- 
ber 31,  1921 : 

Dr.  Cr. 

Bank    $  1,753.18 

Office  Cash  $       13.67 

Accounts  Receivable  2,639.45 

Accounts  Payable 117.36 

Purchases    14,248.62 

Expenses    4,875.09 

Sales  18,792.73 

Machinery    75.19 

Owner's  Capital  Acct 4,752.70 

$23,633.70  $23,633.70 

Investigation  shows  the  bank  account  to  be  correct,  but  cash 
on  hand  is  $75.28;  inventory  is  $2,713.94;  and  machinery  is  worth 
$125.  Examination  of  the  purchase  and  sales  ledgers  shows  noth- 
ing payable  and  $2,514.83  receivable. 

Make  necessary  adjusting  entries,  profit  and  loss  account,  and 
balance  sheet. 

Problem  42 

The  annual  report  of  a  club  contains  both  a  statement  of 
receipts  and  disbursements  and  a  statement  of  income  and  ex- 
pense. You  find  that  the  items  and  figures  in  one  are  identical 
with  those  in  the  other.    Explain  fully  how  this  could  be  true. 

Problem  43 

Two  concerns  fail,  owing  each  other  money,  the  accounts  of 
which  are  included  in  their  respective  Accounts  Payable  accounts. 
A  summary  balance  sheet  of  X,  which  is  accepted  as  correct,  is  as 
follows : 


PROBLEMS    IN    ACCOUNTING  35 

* 

Balance  Sheet  of  Firm  X 

Assets  Liabilities 

Due  from  Y $10,000     Due  to  Y $40,000 

All  other  Assets 180,000      All  other  Liabilities. . .  200,000 

Deficit 50,000 

$240,000  $240,000 

A  summary  balance  sheet  of  Y,  which  is  accepted  as  correct, 
is  as  follows: 

Balance  Sheet  of  Firm  Y 

Assets  Liabilities 

Due  from  X $40,000     Due  to  X $10,000 

All  other  Assets 160,000  All  other  Liabilities .. .  270,000 

Deficit 80,000  

$280,000  $280,000 

The  court  holds  that  it  is  unfair  to  other  creditors  to  allow 
such  firms  to  strike  a  balance  between  their  respective  accounts 
and  then  to  settle  with  the  "outside"  creditors  on  a  percentage 
basis.  Accordingly,  it  is  necessary  to  obtain  a  "ratio  of  solvency," 
i.  e.,  the  percentage  each  concern  will  be  able  to  pay  on  the  basis 
of  the  respective  balance  sheets.    Determine  that  ratio. 

Problem  44 

The  office  of  a  firm  of  traders,  doing  business  in  San  Fran- 
cisco, was  destroyed  by  an  earthquake.  The  books  of  account, 
which  had  been  fully  posted,  were  badly  damaged.  The  follow- 
ing ledger  accounts  were  found  to  be  legible : 

Purchases,  $69,000;  Discounts  "lost,"  $640;  Discounts 
"gained,"  $3,450;  Sales,  $54,000;  Bills  Receivable,  $33,000.  In- 
quiry at  the  bank  disclosed  a  balance  on  deposit  of  $129,000. 
Bills  receivable  amounting  to  $45,000  had  been  discounted  at  the 
bank.  An  audit  of  the  checks  paid  by  the  bank  showed  that 
$99,000  had  been  paid  creditors  (including  $60,000  notes  payable). 
A  balance  sheet  prepared  at  the  last  closing  of  the  books  was  pro- 
duced, containing  the  following  items: 


N 


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I 


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lip 


36 


PROBLEMS    IN    ACCOUNTING 


Cash,  $60,000;  accounts  receivable,  $126,000;  loans  receiv- 
able, $24,000;  real  estate,  $90,000;  notes  receivable,  $78,000; 
capital,  $318,000;  notes  payable,  $60,000. 

Prepare  a  trial  balance,  supplying  the  missing  accounts. 

Problem  45 

(a)  What  is  meant  by  "extraneous  profit"?  By  "extraneous 
loss"?    Give  illustrations. 

(b)  What  is  the  purpose  of  the  operating  statement?  May 
the  net  profits  from  operations  figure  be  used  as  a  common  de- 
nominator of  managerial  efficiency?  To  gain  a  rational  sense  of 
what  his  manager  is  doing,  what  must  the  business  entrepre- 
neur do? 

Problem  46 

Does  a  trial  balance  in  which  the  aggregate  debits  and  credits 
correspond  prove  the  books  to  be  correct  ?    Give  reasons. 

Problem  47 

Is  it  permissible  to  include  in  the  valuation  of  a  plant  con- 
structed by  a  company's  own  employes  for  the  company's  use  an 
amount  of  profits  sufficient  to  bring  the  plant  valuation  to  an 
amount  equivalent  to  the  cost  of  construction  by  an  outside  party? 

In  the  event  that  the  cost  of  materials  had  increased  consid- 
erably after  purchase,  but  subsequent  to  the  date  of  the  comple- 
tion of  construction,  would  you  consider  an  adjustment  necessary 
therefor  ? 

Problem  48 

A  company  purchased  several  machines,  and  in  order  to  in- 
stall them  to  the  best  advantage,  old  machines  which  were  to  re- 
main in  use  were  moved  to  make  room  for  them.  The  machines 
were  large  and  had  to  be  taken  apart  before  they  could  be  moved. 
To  what  account  should  the  cost  of  moving  be  charged,  and  why? 


PROBLEMS    IN    ACCOUNTING 


37 


Problem  49 


The  city  of  Razoo,  in  order  to  encourage  manufacturers  to 
settle  within  its  jurisdiction,  stands  ready  to  transfer  to  them 
sufficient  land  for  their  plant  requirements,  in  addition  to  certain 
other  concessions.  The  Kadoo  Manufacturing  Company  decided 
to  accept  the  following  proposition  made  by  the  city  on  December 
31,  1920: 

1.  To  transfer  land  having  a  value  of  $10,000,  provided  the 
company  erects  a  factory  and  employs  an  average  of  150  men 
during  a  period  of  five  years  to  December  31,  1925. 

2.  The  city  to  contribute  $10,000  toward  the  erection  of  the 
plant. 

3.  The  company  to  pay  no  city  taxes  during  the  period. 

4.  Should  the  company  not  comply  with  the  requirements 
as  to  the  number  of  employes,  the  company  is  to  reimburse  the 
city  for  the  $10,000  given  toward  the  erection  of  the  plant,  and 
$5,000  for  the  land. 

Give  the  journal  entries  necessary  to  record  these  transactions 
on  the  Kadoo  Manufacturing  Company's  books.  In  preparing  a 
balance  sheet  as  at  December  31,  1921,  how  would  you  deal  with 
the  situation? 

Problem  50 

A  concern  needed  an  addition  to  its  plant ;  not  having  enough 
ready  capital,  it  borrowed  money,  and  when  the  interest  was  paid, 
the  expenditure  was  charged  to  the  plant  account  on  the  theory 
that  it  was  not  an  expense  in  the  ordinary  conduct  of  the  business, 
and  should  therefore  not  be  charged  to  the  regular  interest  account, 
but  might  with  propriety  be  charged  as  a  part  of  the  cost  of  the 
addition.    Is  this  theory  sound? 

Problem  51 

A  company  purchased  land,  and  on  this  land  was  a  building 
which  the  company  had  to  pull  down  in  order  to  make  the  required 
use  of  the  land.    During  the  demolishing  of  the  building,  a  work- 


I    [jrr- 


i 


38 


PROBLEMS    IN    ACCOUNTING 


man  was  killed.    To  what  account  should  the  compensation  paid 
on  account  of  this  accident  be  charged,  and  why  ? 

Problem  52 

On  January  1,  1910,  the  Dolorous  Manufacturing  Company 
purchased  land  costing  $12,000,  a  building  for  $30,000,  and  ma- 
chinery costing  $25,000.  No  further  purchases  are  made,  and 
on  January  1,  1920,  the  balance  sheet  of  the  company  disclosed 
the  following  financial  condition: 

Assets 

Land    $  12,000 

Buildings    30,000 

Machinery   25,000 

Mdse.  Inv 60,000 

Accts.  Rec 75,000 

Cash   10,000 


Liabilities 

Capital  Stock 150,000 

Surplus    23,500 

Reserve  for  Depr'n 

of  Buildings 7,500 

of  Machinery 15,000 

Accounts  Payable 16,000 


$212,000  $212,000 

Depreciation  had  been  computed  each  year  on  the  original  cost. 

On  May  16,  1920,  the  factory  burned  down,  a  total  loss  en- 
suing. Their  books  of  account  as  on  that  date  show  the  follow- 
ing ledger  balances : 


Land  $  12,000 

Buildings    30,000 

Machinery   25,000 

Mdse.  Inv.  1/1/1920..  60,000 

Purchases   160,000 

Labor  and  Facty.  Cost .  60,000 

General  Ex 45,000 

Accounts  Rec 73,000 

Cash    22,000 


Capital  Stock $150,000 

Surplus   23,500 

Reserve  for  Depreciation 

of  Buildings  7,500 

of  Machinery 15,000 

Sales,  Net  280,000 

Accounts  Pay 11,000 


$487,000  $487,000 

For  the  years  1917, 1918,  and  1919,  the  books  showed  a  "gross 
profit  on  sales"  averaging  25%  of  net  sales.  The  company,  how- 
ever, succeeds  in  obtaining  $65,000  from  Fire  Insurance  Company 
for  merchandise  lost. 


4 

I    . 


PROBLEMS    IN    ACCOUNTING 


39 


The  insurance  company  acknowledges  that  the  cost  of  replac- 
ing buildings  and  machinery  would  be  10%  higher  in  1920  than  in 
1910,  and  after  taking  this  fact  into  consideration  and  determining 
what  they  hold  to  be  fair  depreciation,  they  settle  these  two  items 
as  follows :  Buildings  $28,000,  machinery  $17,500.  The  company 
erects  a  new  building  costing  $40,000,  and  purchases  machinery 
costing  $35,000.  Finding  the  value  of  its  land  to  be  now  $24,000, 
the  company  makes  book  entry  to  so  record  it. 

Prepare  journal  entries  properly  to  record  all  the  above  tran- 
sactions, including  cash  losses  or  gains  due  to  the  fire,  actual  trading 
profit  from  January  1, 1920,  to  date  of  fire,  and  balance  sheet  after 
making  all  of  above  entries.  For  the  purposes  of  this  question,  as- 
sume no  accounts  receivable  collected  or  accounts  payable  paid,  be- 
tween May  16th  and  the  date  of  settlement. 

Problem  53 

The  Rapanook  Coal  Co.  has  capital  stock  of  $8,000  divided 
into  80  shares  of  par  value  of  $100,  owned  as  follows : 

John  Pick 60  shares 

James  Shovel  10  shares 

Dick  Spade 10  shares 

John  Pick  was  elected  president;  Ray  Fork,  vice-president 
and  manager ;  and  DeLong  Rake,  secretary  and  treasurer.  Neither 
Fork  nor  Rake  held  any  stock,  but  they  were  nevertheless  to 
receive  the  following  percentages  of  net  profits:  Fork  15%, 
Rake  10%. 

At  the  end  of  the  year  1920  there  were  apparent  profits  of 
$8,640.46  to  divide;  but  before  the  division  took  place  it  was 
discovered  that  the  treasurer  Rake,  who  owed  the  company 
$2,264.14  had  disappeared.  He  was  not  financially  responsible 
and  was  not  bonded,  hence  his  account  was  quite  uncollectible. 
Therefore  the  net  profits  are  not  $8,640.46  because  of  the  loss 
from  Rake's  uncollectible  account.  Rake's  account,  however,  is 
not  the  entire  balance  of  $2,264.14,  since  he  was  entitled  to  a 
credit  of  10%  of  the  net  profits. 

Compute  the  uncollectible  balance  of  Rake's  account. 


Ill 


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40 


PROBLEMS    IN    ACCOUNTING 


I!      (I 


Problem  54 

The  firm  of  Run  &  Gettem  engage  in  a  restaurant  business 
where  all  sales  are  for  cash,  with  the  express  pur|X)se  at  a  later 
date  of  selling  it  out  on  the  strength  of  the  large  profits  shown 
by  the  books.  With  this  object  in  view  they  grossly  pad  their  sales 
every  day  and  make  compensating  fraudulent  entries  on  the  dis- 
bursement side  of  the  cash  book  purporting  to  represent  the  cash 
withdrawals  of  partners,  and  all  records  by  which  the  cash  sales 
might  possibly  be  verified  are  destroyed.  Run  &  Gettem  make  a 
proposition  to  Mr.  A  to  sell  their  business  to  him,  and  on  the 
showing  of  the  profits  made  by  the  books  Mr.  A  seriously  con- 
siders the  purchase,  but  engages  an  accountant  to  make  an  exam- 
ination. The  latter  discovers  the  fraud.  How  did  he  probably 
discover  it? 

Problem  55 

A  has  agreed  to  sell  to  B  the  good- will  of  the  Kayo  Com- 
pany on  the  basis  of  three  years'  profits  of  the  business  to  be 
determined  by  you  on  the  basis  of  sound  accounting  principles  as 
accurately  as  possible  from  the  following  statement  handed  you 
by  A.  You  are  required  to  compute  the  value  of  the  good- will, 
but  are  not  expected  to  take  into  account  any  considerations  out- 
side those  presented  by  the  statements. 

Credits 

1st  Year     2nd  Year      3rd  Year 

Sales  (Selling  prices  substantially 

uniform  during  period) $638,400    $602,500    $564,000 

Estimated  value  of   construction 

work  performed  and  charged  to 

property   110,000         77,600  154,000 

Appreciation  of  real  estate  upon 

revaluation  by  experts 80,000       

Profit  on  sale  of  Bethlehem  Steel 

Co.  stock 85,000 


PROBLEMS    IN    ACCOUNTING  41 

Inventory  at  end  of  period — 

Production  mat'l  at  cost 72,000  103,100  106,600 

Finished  goods  at  selling  prices.     76,500  114,000  150,000 

$896,900  $977,200  $1,059,600 

Debits 

Production  material  purchased ..  $233,000  $252,400  $    220,300 

Production  labor 50,850  61,400  60,900 

Production  expense  (including  de- 
preciation)         66,750  69,300  70,300 

Selling  expenses   52,500  55,650  62,800 

Interest    96,000  94,000  98,500 

Cost  of  construction  work 74,600  49,000  86,000 

Inventory  at  beginning  of  period 

Production  material  at  cost... .     51,400  72,000  103,100 

Finished  goods  at  selling  prices.     54,900  76,500  114,000 

$680,000  $730,250  $    815,900 


Balance,  designated  profit  by  A.  .$216,900    $246,950    $   243,700 

Problem  56 

In  a  large  country  store  containing  several  departments,  con- 
siderable produce  is  taken  in  the  grocery  section  from  farmers  for 
which  trading  orders  are  issued  redeemable  in  merchandise  in 
any  department.    How  should  such  transactions  be  recorded? 

Problem  57 

What  is  meant  by  the  "balance  account"  under  the  theory  of 
double  entry?  How  was  the  account  used  originally?  What  has 
become  of  it  in  modem  bookkeeping  practice? 

Problem  58 

Explain  what  is  meant  by  an  accrual.  Give  several  illustra- 
tions. Discuss :  "An  accrual  is  the  present  status  of  a  growth  on 
some  basis  of  uniform  increase." 


* 


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42 


PROBLEMS     IN     ACCOUNTING 


Problem  59 

Expound  the  "double  form"  balance  sheet.  Explain  the  con- 
nection between  its  parts.    What  is  the  theory  of  the  separation? 

Problem  60 

What  is  the  distinction  made  in  accounting  practice  between 
"nominal"  and  "real"  accounts?  between  "personal"  and  "imper- 
sonal" accounts? 


\ 


Problem  61 

We  can  well  say  that  it  is  the  very  purpose  of  the  operating 
(expense  and  revenue)  statement  to  show  the  ups  and  downs  of 
business.  There  should  be  no  attempt  to  iron  out  as  between 
periods  the  unevenness  of  profit  and  loss  figures,  provided  they 
have  their  origin  in  the  strictly  operating  phases  of  business 
change.  It  is  the  nature  of  the  business  game  to  fluctuate  for 
good  or  ill;  and  so  far  as  business  fluctuations  are  periodic  in 
character,  they  should  be  permitted  to  find  full  expression  in  the 
periodic  "net  profits"  figure.  Discuss.  If  we  are  accounting  for 
"extraneous"  or  extra-periodic  occurrences,  some  care  should  be 
exercised  to  see  that  the  periodic  profits  figure  is  not  disturbed 
beyond  its  due  share.  This  may  mean  that  we  shall  have  to  "pro- 
rate" expense  or  revenue,  or  make  an  adjustment  of  accumulated 
profits.  The  latter  would  be  the  case  when  a  loss  has  occurred 
which  was  not  determinable  in  advance  of  its  happening,  although 
it  is  admitted  to  be  a  "cost  of  operation."  Or  such  an  adjustment 
of  surplus  would  be  required  when  a  purely  differential  gain  was 
realized,  or  an  entirely  non-business  loss.  Discuss  fully,  giviiTg 
illustrations.  To  what  extent,  in  your  opinion,  can  the  periodic 
operating  statement,  read  in  comparison  with  a  previous  one,  he 
used  as  a  gauge  of  managerial  efficiency? 

Problem  62 

Surplus  is  a  credit  which  gauges  an  element  in  the  asset  total. 
What  kind  of  an  error  in  accounting  thinking  does  this  definition 
of  surplus  forestall  ?    Contradistinguish  the  different  credits  which 


! 


PROBLEMS    IN    ACCOUNTING 


43 


may  or  may  not  be  said  to  "gauge  an  element"  in  "the  asset  total" 
Name  and  illustrate  the  three  principal  types  of  accounts  with  debit 
balances  and  with  credit  balances. 

Problem  63 

When  we  talk  of  operating  statements  we  of  course  have  in 
mind  an  oflfsetting  of  values  which  have  been  realized — realized 
by  actual  purchase  or  realized  by  actual  sale.  To  the  entrepreneur 
only  such  events  are  meaningful  as  have  been  realized.  At  any 
rate,  this  is  true  so  far  as  concerns  his  present  operations.  When 
the  entrepreneur  makes  an  expenditure  he  "ties  up"  his  capital 
and  adds  to  his  risk,  and  the  most  convenient  measure  of  his  re- 
sponsibility in  this  regard  is  his  money  outlay.  When  he  makes 
a  sale,  and  only  then,  has  society  relieved  him  of  this  responsibility. 
And  he  can  rationally  define  a  sale  only  as  an  exchange  which  has 
given  him  general  purchasing  power  in  return  for  something  which, 
as  long  as  he  possessed  it,  served  only  to  add  to  his  burden  of 
capital  ownership. 

Periodic  business  income  may  be  defined  as  the  excess  of 
actual  sales  over  the  cost  of  sales  plus  the  expenses  of  marketing 
and  administration. 

What  have  you  to  offer  for  and  against  the  inventory  maxim 
of  "cost  or  market,  whichever  is  lower." 

How  do  you  regard  the  contention  that  the  operating  state- 
ment should  incorporate  no  change  of  an  anticipated  character, 
either  positive  or  negative?  (Change  relative  to  cost,  of  course, 
determined  as  accurately  as  possible.)  If  favorable,  you  must 
have  an  alternative  to  suggest  with  regard  to  anticipating  losses, 
for  surely  you  agree  that  in  the  present  dynamic  situation  the  en- 
trepreneur should  take  all  measures  to  protect  his  working  invest- 
ment. 

What  do  you  say  pro  and  con  in  regard  to  replacement  cost 

as  an  inventory  basis  ? 

Problem  64 

What  in  your  opinion  are  proper  income  determinants  in 
business  ? 


I'   r- 


ill 


44 


PROBLEMS    IN    ACCOUNTING 


Problem  65 

State  the  problems  of  materials  pricing  arising  in  connection 
with  perpetual  inventorying  of  stores  under  a  cost  system. 

Problem  66 

In  what  respect  and  for  what  purpose  could  comparative  statis- 
tics or  percentages  be  made  use  of  as  regards  the  following : 

(a)  Gross  profit  on  sales  (b)  Costs  of  producing  specific 
units  (c)  Turnover,  (d)  Sales  volume,  (e)  Merchandise  ''con- 
sumed" (f )  Selling  and  administrative  expenses  (g)  Detection  of 
fraud. 

Problem  67 

Under  what  circumstances,  if  any,  are  reconstruction  or  re- 
habilitation costs  properly  chargeable  to  the  property  account? 

Problem  68 

Discuss  the  following:  A  capital  expenditure  is  any  con- 
version of  capital  into  some  relatively  permanent  form  which  adds 
to  the  latter's  service  life,  or  increases  the  total  sum  of  utilities 
which  it  can  give  toward  further  production. 

Problem  69 

Only  on  condition  that  original  cost  is  the  proper  basis  of 
measurement  of  business  income  is  it  proper  to  carry  fixed  assets 
at  cost  less  accrued  depreciation,  and  then  only  in  the  case  of  a 
going  concern.  In  other  cases  cost  of  replacement  less  accrued 
depreciation  would  be  more  desirable.  What  is  in  mind  here? 
What  do  you  have  to  offer  for  or  against  adjusting  fixed  asset 
values  to  replacement  costs  in  the  case  of  a  going  concern? 

Problem  70 

Reserves  are  used  for  the  following  purposes:  1.  To  indi- 
cate accrued,  but  estimated,  decreases  in  specific  asset  values ;  2. 
To  indicate  accrued,  but  estimated,  liabilities ;  3.    To  indicate  a 


PROBLEMS    IN    ACCOUNTING 


45 


favorable  proprietary  element  in  the  asset  total  which  may  be 
cancelled  by  the  withdrawal  of  assets  without  endangering  the 
maintenance  of  an  adequate  investment ;  4.  To  indicate  a  proprie- 
tary element  in  the  asset  total  which,  although  at  present  unes- 
sential to  economic  operation,  may  yet  not  be  withdrawn  without 
placing  the  investment  in  a  doubtful  condition  or  without  endanger- 
ing the  due  payment  of  some  liability;  5.  To  indicate  not  esti- 
mated accrued  decreases  of  specific  asset  values,  but  estimated 
future  decreases  from  those  values  quite  within  the  field  of  prob- 
ability; 6.  Reserves  which  exist,  but  are  not  booked.  Expound 
and  illustrate. 

Problem  71 

What  is  the  accounting  significance  of  a  probable  as  compared 
with  a  possible  loss? 

Problem  72 

What  is  the  distinction,  if  any,  between  a  deferred  debit  and 
a  deferred  asset?  Between  a  deferred  credit,  a  deferred  liability, 
and  a  deferred  sale? 

Problem  73 

What  are  all  the  reasons  for  providing  a  "sinking  fund  out  of 
profits?"    Be  sure  you  know  what  the  phrase  means. 

Problem  74 

Having  been  employed  to  certify  to  the  profits  of  a  manu- 
facturing concern  for  the  past  five  years  for  prospectus  purposes, 
your  work  reveals  that  the  recorded  profits  require  adjustment 
as  follows: 
Year  Ledger 

1906  profit   $54,920 

1907  profit   69,100 

1908  profit   41,320 

1909  loss 1,640 

1910  profit   22,060 


Adjustment  Account 

Reduced  by $4,200 

Increase  by 8,520 

Reduce  by  6,900 

Reduce  by  1,020 

Increase  by 1,360 


Average  Profit $37,152    Net  Reduction  $ 


200 


46 


PROBLEMS     IN    ACCOUNTING 


Those  interested  point  out  to  you  that  as  only  the  average 
profit  for  the  period  is  required  to  be  certified  to,  you  may  dis- 
regard the  small  difference  of  $200. 

State  your  opinion. 

Problem  75 

Some  objection  has  been  raised  to  calfing  the  "capital"  ac- 
count a  "liability"  account.  Discuss  this  objection,  stating  your 
opinion.    Give  reasons. 

Problem  76 

What  is  the  distinction  to  be  drawn  between  a  "capital"  and 
a  "revenue"  expenditure? 

Problem  77 

(a)  Define  the  accounting  transaction,  and  explain  how  it 
fits  into  the  "double-entry"  framework.  Give  examples  of  five 
kinds  of  transactions  stated  in  terms  of  the  balance  sheet  classes, 
(b)  Define  the  account.  Show  how  the  conventional  double  ac- 
count form  gains  superiority  over  other  possible  forms. 

Problem  78 

What  is  the  most  logical  basis  for  grouping  assets  and  liabil- 
ities in  the  balance  sheet?  In  what  different  ways  are  these 
groups  arranged  in  practice?    Give  the  reasons  in  each  case. 

Problem  79 

How  is  an  intangible  asset  to  be  distinguished?  Would  you 
consent  to  carrying  the  classification  of  intangibles  to  include  items 
like  bonds  and  notes  receivable? 

Problem  80 

(a)  What  is  the  significance  of  the  division  which  is  usual- 
ly made  of  the  income  account  into  sections  called  "manufactur- 
ing," "selling,"  "administrative,"  and  "secondary  or  net  deductions 
and  additions?" 


PROBLEMS    IN    ACCOUNTING 


47 


(b)  Define  the  following:  "Cost  of  goods  sold,"  "cost  of 
goods  manufactured,"  "goods  in  process,"  "gross  revenue  from 
sales,"  "net  operating  revenue,"  "net  profit."  Explain  how  each 
is  determined. 

Problem  81 

What  are  the  component  elements  of  the  revenue  credit? 
What  relation  to  the  revenue  credit  has  the  debit  to  expense? 
What  is  the  function  of  the  expense  and  revenue  accounts? 

Problem  82 

"An  account  is  usually  classified  according  to  its  predominat- 
ing element."    Explain. 

Problem  83 

Name  the  accounts  which  you  would  expect  to  find  in  the 
ledger  of  a  medium-sized  merchandising  establishment,  indicating 
which  ones  would  probably  appear  in  the  trial  balance  "before 
closing"  but  not  in  the  balance  sheet. 

Problem  84 

The  City  Coal  Company  is  organized  December  1,  1920.  The 
proprietors  are  A.  B.  Culver  and  D.  E.  Flushing,  equal  partners. 
On  January  1,  1921,  you  are  called  in  to  prepare  a  balance  sheet 
showing  the  present  financial  condition  of  the  firm.  You  find 
assets  and  liabilities  as  follows :  Cash,  $1,000 ;  coal,  $6,000 ;  office 
furniture  and  equipment,  $300;  note  payable,  $500;  due  from 
Homer  Horner,  $400;  supplies,  $50;  due  to  Babbitt  and  Com- 
pany, $1,500 ;  unexpired  insurance,  $30 ;  rent  accrued  on  yard  and 
office,  $200.  Exhibit  this  statement.  Assuming  each  partner  in- 
vested $2,700  on  December  1,  1920,  what  was  the  profit  for  the 
month  of  December? 

Problem  85 

State  concisely  why  it  is  necessary  to  supplement  the  routine 
work  of  the  bookkeeper  with  the  process  of  taking  inventory  in 
order  that  rational  statements  of  income  and  financial  condition 


! 


48  PROBLEMS    IN    ACCOUNTING 

may  be  prepared.  Stale  three  schemes  for  determining  "cost"  of 
goods  on  hand.  What  is  meant  by  the  statement  that  taking  of 
inventory  in  the  case  of  the  manufacturing  estabHshment  is  es- 
sentially a  problem  of  "cost  distribution"? 

Problem  86 

The  fiscal  year  of  a  Manufacturing  Company  ends  Jure;  30, 
1908,  and  the  bookkeeper  presents  a  statement  to  the  Directors 
made  up  in  the  following  form: 

Gross  Sales  $285,000 

Increase  of  Inventory 15,000         $300,000 

Cost  of  sales : 

Operating  expenses,  material  and  sup- 
plies     257,000 

Plant  Expense  12,000 

Freight  on  returned  goods 600 

Sundry  purchases  finished  goods 10,400           280,000 

Manufacturing  profit 20,000 

Other  Income: 

Miscellaneous  Earnings 1,500 

Profit  on  Contracts 6,500 

Discount  on  Purchases  500  8,500 

$  28,500 

Less: 

Discount  on  Sales 2,875 

Rebates  and  Allowances 1,125  4,000 

Net  Plant  Profit $  24,500 

Less: 

General  Expenses  5,500 

Interest   1,500  7,000 

Net  Profit  $  17,500 


PROBLEMS    IN    ACCOUNTING 


49 


You  are  required  to  make  up  a  working  sheet,  using  such 
of  the  above  figures  as  may  be  necessary,  together  with  these  fol- 
lowing: Inventory  June  30,  1907:  Materials,  $115,000;  Supplies, 
$35,000;  Finished  Goods,  $45,000.  Inventory  June  30,  1908: 
Material,  $140,000 ;  Supplies,  $10,000 ;  Finished  Goods,  $60,000. 
Materials  used  in  factory  during  the  year,  $75,000 ;  Wages,  $122,- 
500 ;  Fuel,  $2,500 ;  Repairs  and  Renewals,  $2,000 ;  other  operating 
expenses,  $55,000,  which  includes  $25,000  supplies  used.  Now 
recast  the  above  statement. 

Problem  87 

What  entries  would  you  make  to  account  for  street  car  ticket 
sales  and  cancellations,  noting  specifically  the  effect  upon  the  in- 
come statement  and  the  balance  sheet? 

Problem  88 

"No  dividends  can  be  declared  before  the  expenses  of  run- 
ning the  business  are  paid.  These  expenses  include  payment  of 
Bills  Payable  that  are  due,  because  a  bill  payable  is  merely  written 
evidence  of  an  account  due.  A  bond  is  a  promissory  note  and, 
therefore,  of  the  same  category  as  bills  payable.  Since  a  bond 
is  equivalent  to  a  bill  payable,  no  dividend  can  be  paid  out  before 
the  bond  is  paid  off." 

Examine  critically  the  above  statement. 

SECTION  III.    Accounting  for  Partnerships. 

The  principal  problem  under  this  head  deals  with  one  of 
three  things:  1.  Revaluation  of  assets  of  a  business  which  is 
taking  in  new  interests ;  2.  Determination  of  partnership  income 
and  its  distribution  according  to  the  contract;  3.  Determinaton 
of  the  status  of  the  partners  and  other  equities  in  the  event  of 
failure,  and  the  necessity  for  realizing  asset  values  and  liquidating 
claims. 

If  a  business  is  taking  in  a  new  interest  it  may  require  of  the 
purchaser  that  he  pay  a  sum  greater  than  that  which  corresponds 


50 


PROBLEMS    IN    ACCOUNTING 


arithmetically  to  his  proposed  fractional  share.  This  the  purchaser 
may  be  willing  to  do  because  the  particular  business  into  which 
he  is  thinking  of  buying  is  able  to  earn  an  especially  high  rate  on 
a  given  investment.  The  amount  of  the  excess  agreed  to  in  the 
purchase  price  is  called  goodwill — or  the  developed  and  trans- 
ferrable  capacity  of  a  particular  business  entity  to  make  a  "supra- 
normal"  profit  rate.  Theoretically  it  may  be  arrived  at  by  the 
capitalizing  of  excess  earnings  at  the  normal  rate.  Practically 
such  a  method  of  evaluating  the  goodwill  intangible  is  rarely  used. 
The  excess  is  usually  treated  as  a  three  or  four  years'  "purchase," 
or  the  goodwill  is  considered  as  approximately  equal  in  value  to 
a  sum  which  buyer  and  seller  agree,  under  all  the  circumstances,  to 
be  justifiable.  At  any  rate,  if  goodwill  is  recognized,  it  means 
that  the  sum  total  of  the  assets  of  the  selling  business  is  greater 
than  that  actually  exhibited  on  the  books  up  to  the  time  of  the  sale. 
That  is,  the  value  of  the  assets  is  greater  than  before  by  the 
amount  of  the  intangible.  Such  an  increase  is  of  course  a  special 
profit  accruing  to  the  selling  proprietors.  Conservative  account- 
ants sometimes  refuse  to  recognize  goodwill  as  a  specific  asset, 
and  credit  the  excess  of  the  buyer's  payment  to  the  capital  account 
of  the  vending  interests  in  their  profit  and  loss  sharing  ratio. 
However,  if  bona  fide,  there  is  perhaps  little  reason  in  theory  to 
object  to  showing  goodwill  on  the  balance  sheet  of  the  new  entity. 

If  the  buyer  pays  a  sum  which  is  less  than  that  which  corre- 
sponds arithmetically  to  his  proposed  share,  it  is  possible  that  just 
the  opposite  to  the  above  is  true  with  respect  to  the  earning  ca- 
pacity of  the  business.  And  a  special  loss,  rather  than  a  profit, 
will  have  to  be  absorbed  pro  rata  by  capital  accounts  of  the  selling 
interests. 

Revaluation  of  the  assets  of  a  business  becomes  necessary 
in  the  following  events:  (a)  change  of  a  single  proprietorship 
into  a  partnership ;  (b)  change  of  the  personnel  of  a  partnership, 
that  is,  change  of  the  agreement,  since  agreement  and  parties  can- 
not be  disassociated;  (c)  change  of  a  partnership  into  a  corpora- 
tion. 


PROBLEMS     IN    ACCOUNTING 


61 


The  determination  of  partnership  income  is,  of  course,  no 
diiferent  a  problem  from  that  presented  by  any  other  business. 
Obedience  to  sound  accounting  principles,  and  thorough  recogni- 
tion of  the  necessity  for  preserving  the  integrity  of  operating 
results  are  all  that  is  required  to  show  the  truth  in  periodic  state- 
ments so  far  as  such  brief  approximations,  representing  such  brief 
intervals  of  time,  may  show  the  truth.  The  chief  problem  in  this 
connection,  that  is,  in  regard  to  income,  is  in  its  distribution  ac- 
cording to  the  agreement  of  the  business  partners,  or,  in  the  ab- 
sence of  specific  agreement,  according  to  the  legal  rule  for  such 
cases.  Sometimes  certain  partners  are  allowed  interest  on  their 
investments  as  of  some  specified  date,  while  all  the  partners 
receive  their  profit  and  loss  percentages  of  the  remaining  profits ; 
sometimes  no  mention  is  made  of  a  fixed  return  on  the  form  of 
interest,  and  all  the  partners  covenant  to  divide  the  total  profits 
in  accord  with  the  profit  and  loss  sharing  ratio ;  there  are  instances 
in  which  partners  have  been  charged  interest  on  their  withdrawals, 
but  it  is  usually  held  that  withdrawals,  if  not  excessive,  are  made 
against  current  profits.  It  is  interesting  to  note  that  the  profit 
and  loss  sharing  ratio  may  be  determined  on  the  basis  of  capital 
balances  at  the  beginning  of  an  accounting  period,  at  the  end,  on 
the  basis  of  the  average  investment  (computed  by  averaging  with- 
drawals and  investments  to  a  monthly  basis),  or  according  to  some 
arbitrary  arrangement  by  percentages  or  otherwise.  The  law 
usually  holds  to  even  distribution  in  cases  where  the  agreement 
is  silent  on  the  point,  regardless  of  what  may  be  a  great  disparity 
in  the  investments  made  by  the  several  partners. 

The  problem  of  realization  and  liquidation  following  failure 
comes  up  under  this  head  only  as  related  to  unascertained  profits 
and  losses  which  may  take  place  in  process  of  realizing  book 
values,  and  to  the  apparent  inexpediency  of  making  a  partial 
distribution  to  a  partner  when  the  remainder  of  his  capital  account 
does  not  equal  his  profit  and  loss  sharing  ratio.  Where  there  are 
partners*  loan  accounts,  the  usual  rule  is  to  treat  the  loan  equities 
as  equivalent  to  investments,  so  long  as  there  is  a  possibility  that 
the  partners*  capital  accounts  will  not  be  large  enough  to  absorb 


52 


PROBLEMS    IN    ACCOUNTING 


their  pro  rata  share  of  losses.     Outside  equities,  of  course,  stand 
in  the  usual  preferential  position. 

The  following  problems  are  illustrative  of  the  foreoging  brief 
discussion. 

Problem  89 

The  ledger  account  balances  after  closing  of  the  Ku-Klux 
Partnership  for  the  periods  ending  December  31,  1915,  and  De- 
cember 31,  1916,  are  as  follows: 

Account                                      Dec.  31,  1915  Dec.  31,  1916 

Buildings    $20,000  $1^,000 

Accounts  Receivable 10,000  30,000 

Cheese  on  hand 5,000  6,000 

Accounts  Payable  15,000  25,000 

Cash   10,000  25,000 

Fire  Insurance  Premium 600  400 

Ku,  Capital  ?  ^  v  ?  33  a  ^^^ 

Klux,  Capital '     ? -^  ? 22.  '"^^ 

According  to  the  articles  of  agreement,  Ku  is  to  receive  three- 
fifths  of  the  profits  and  Klux  two-fifths.  Asuming  that  their  capi- 
tal accounts  as  of  December  31,  1915,  were  adjusted  to  the  profit 
and  loss  sharing  ratio  by  withdrawal  or  new  investment,  and  that 
no  new  investment  or  withdrawal  was  made  during  1916,  compute 
the  profits  for  the  period  December  31,  1915-December  31,  1916, 
and  exhibit  the  balance  sheet  of  the  partnership  as  of  the  latter 
date,  showing  the  balance  at  the  credit  of  Ku  and  the  balance  at 
the  credit  of  Klux. 

Suppose  that  on  January  1,  1917,  Ku  and  Klux  decided  to 
admit  Klan  into  the  business  on  the  basis  of  an  offer  of  $100,000 
for  a  half  interest  therein,  cash  contributed,  what  entries  would 
you  find  it  necessary  to  make  to  properly  record  the  transactions, 
in  one  analysis  recognizing  the  goodwill  sold,  in  the  other  omitting 
it?  (Profit  from  the  sale  of  goodwill  should  be  divided  in  the 
agreed  profit  and  loss  ratio.) 


A 


PROBLEMS    IN    ACCOUNTING  53 

Problem  90 

A  is  a  manufacturer  of  carpets,  and  his  balance  sheet  as  a 
certain  date  appears  as  follows : 

Assets  Liabilities 

Cash  in  bank $     815.00      Bills  Payable $22,000.00 

Real  Estate,  apprais-                ,     Book  Accounts  Pay- 
ed value 20,000.00         able 28,000.00 

Machinery  after  10% 
depreciation   40,000.00 

Book    Accounts    Re- 
ceivable       7,227.50 

Inventory,  stock  fin- 
ished      11,000.00 

Inventory,    stock    in 
looms   850.00 

Inventory,  raw  mate- 
rials and  supplies..        107.50 


$80,000.00 

He  agrees  with  B  to  sell  him  one-half  interest  in  the  business 
for  $20,000.00,  to  be  contributed  to  the  new  firm,  the  new  firm 
to  take  over  the  assets  of  A  with  the  exception  of  the  real  estate, 
and  to  assume  all  the  liabilities.  The  two  further  agree  that  the 
goodwill  of  the  business  of  A  shall  be  rated  at  $20,000.00  in  the 
books  of  the  new  firm.  It  was  understood  that  A  guaranteed 
the  correctness  of  the  accounts.  Shortly  after  beginning  of  busi- 
ness the  discovery  was  made  that  the  inventory  of  finished  stock 
was  incorrect ;  that  the  value  should  have  been  stated  at  $8,500.00, 
instead  of  $11,000.00,  and  that  of  the  book  accounts  receivable 
only  $6,227.50  were  collectible,  one  of  the  debtors,  owing 
$1,000.00,  having  failed  and  absconded  previous  to  the  formation 
of  the  partnership  leaving  no  assets,  which  fact  was  known  to  A, 
and  he  had  instructed  his  bookkeeper  to  write  off  the  account,  but 
the  latter  had  failed  to  do  so.  No  correction  was  made  of  these 
discrepancies.    The  trial  balance  at  the  end  of  one  year's  business 


54  PROBLEMS    IN    ACCOUNTING 

was  as  follows: 

Dr.  Cr. 

A  Capital  Account $25,000.00 

B  Capital  Account 25,000.00 

A  Personal  Account $  3,100.00 

B  Personal  Account 3,100.00 

Merchandise    78,000.00 

Book  Accounts  Receivable 15,400.00 

Expense   1,500.00 

Machinery    40,000.00 

Manufacturing  Expense  22,000.00 

Wages  44,000.00 

Rent 1,500.00 

Profit  and  Loss 600.00 

Book  Accounts  Payable 45,200.00 

Cash   22,000.00 

Goodwill    20,000.00 

$173,200.00    $173,200.00 

The  inventory  at  the  close  of  the  year  footed  as  follows : 

Finished  Stock $28,000 

Stock  in  Looms 1,500 

Raw  Material  and  Supplies 1,500 

$31,000 

No  amount  had  been  charged  off  for  depreciation  of  ma- 
chinery, which  should  be  done  at  the  rate  of  10%. 

Make  the  proper  entries  to  correct  the  books,  and  formulate 
balance  sheet  showing  the  standing  of  the  firm,  and  give  reasons 
for  any  correction  that  may  be  made. 

Problem  91 

R.  M.  Smith  and  C.  B.  Jones  entered  into  a  partnership  on 
January  1,  1916,  whereby  interest  at  the  rate  of  6%  per  annum 
was  to  be  allowed  on  the  capitals  of  the  partners  at  the  beginning 


PROBLEMS    IN    ACCOUNTING 


55 


of  each  year,  and  the  remaining  profits  divided  equally.     Smith 
invested  $30,000  and  Jones  $15,000. 

At  the  end  of  three  years  C.  B.  Jones  desires  to  withdraw. 
Although  a  statement  of  condition  had  been  prepared  at  the  end 
of  each  year  the  profits  were  not  ascertained.  The  drawings  dur- 
ing the  year,  and  the  assets  and  liabilities  at  the  close  of  each  year 
were  as  follows: 

Liabilities 


Year 


Assets 


Drawings  During  Year 
R.  M.  Smith      C.  B.  Jones 
$1,500  $500 

1,200  300 

800  400 


1916  $68,000     $20,000 

1917  73,000      25,500 

1918  76,000      31,000 

In  order  to  arrive  at  a  basis  for  the  purchase  of  C.  B.  Jones* 
interest  by  Mr.  Smith  you  are  asked  to  prepare  exhibits  of 

(1)  the  profits  for  each  of  the  three  years. 

(2)  the  division  of  the  profits  each  year. 

(3)  the  capital  accounts  of  the  partners. 

Problem  92 

Two  partners  named  Wilson  and  Peters  find  at  the  end  of 
the  first  year's  business  the  Balance  Sheet  showing  that  Wilson's 
interest  is  worth  $18,000.00  and  Peters'  $9,000.00. 

The  good  will  of  the  firm  is  worth  $3,000.00.  Each  draws 
profits  in  proportion  to  his  investment. 

They  decide  to  take  in  another  partner,  and  he  is  to  have  a 
one-quarter  interest  in  the  new  firm. 

What  sum  must  the  new  partner  contribute?  How  will  the 
partnership  accounts  appear  after  the  payment  of  the  additional 
capital  ? 

How  will  the  profits  be  divided.  Give  skeleton  form  of  ac- 
counts. 

Problem  93 

X  and  Y  enter  into  partnership,  X's  capital  being  $20,000, 
and  Y's  $15,000.    Capital  is  to  bear  interest  at  10  per  cent,  per 


'4- 


56  PROBLEMS     IN    ACCOUNTING 

annum.  Profits  are  to  be  divided  equally  between  the  parties. 
The  profits  for  the  first  two  years  (after  charging  interest  on 
capital)  were: 

1st  year $6,000 

2nd  year 7,500 

and  the  drawings  of  the  partners  (in  excess  of  salaries)  were: 

X $1,500  first  year,  $1,750  second  year 

Y 1,200  first  year,    1,500  second  year 

At  the  end  of  the  second  year  Z  was  admitted  to  partnership, 
and  put  into  the  business  the  same  amount  of  capital  as  Y  had 
in  the  business  at  that  time,  and  on  the  same  conditions  as  to 
interest  and  division  of  profits.  The  profits  of  the  business  for 
the  third  year  were  $12,000,  and  the  partners'  drawings  in  excess 
of  salaiy  were: 

X $1,750 

Y 1,600 

Z   1,500 

Construct  the  capital  accounts  of  the  partners  for  each  of  the 
three  years,  showing  the  balance  of  each  at  the  end  of  the  third 
year. 

Problem  94 

(a)  A  has  $5,000  invested  in  a  business.  He  sells  B  a  half 
interest  for  $3,000  and  keeps  the  money.    Make  the  entry. 

(b)  A  has  $5,000  invested  in  a  business.  He  sells  B  a  half 
interest  for  $3,000  and  places  the  money  in  the  business.  Make 
the  entry. 

Problem  95 

In  case  you  were  consulted  by  prospective  partners  in  regard 
to  the  terms  of  a  partnership  agreement  what  points  would  you 
recommend  to  be  incorporated  in  such  an  agreement? 

Problem  96 

Peters,  Roberts,  and  Black  are  partners,  Peters  having 
$15,000.00,  Roberts  $10,000.00,  and  Black  $5,000.00  capital,  and 


PROBLEMS    IN    ACCOUNTING 


57 


they  share  profits  and  losses  equally.  They  agree  to  admit  White 
on  condition  that  he  pay  $10,000.00  for  one-fourth  interest  in 
the  profits  only.  How  would  the  $10,000.00  paid  in  by  White  be 
treated  on  the  books  of  the  firm,  and  how  would  the  capital  ac- 
counts of  the  partners  stand? 

Problem  97 

Bilsom  and  Marley  are  partners,  sharing  profits  and  losses 
equally.  The  partnership  is  dissolved  December  31,  1907,  at  which 
time  Bilsom's  capital  investment  is  $10,000,  and  Marley's  $2,500. 
The  total  liabilities  of  the  firm  are  $25,000,  which  includes  $5,000 
due  Bilsom  on  loan  account  and  $2,500  due  Marley  on  loan  ac- 
count. The  whole  of  the  assets  of  the  firm  are  disposed  of  for 
$30,000  cash  on  May  1,  1908.  Prepare  accounts  closing  the  part- 
nership and  show  the  position  in  which  the  partners  stand  with 
each  other.    No  allowance  for  interest  is  required. 

Problem  98 

A,  B,  and  C  were  partners  and  contributed  the  following  capi- 
tal :  A,  $8,000 ;  B,  $6,000,  and  C,  $4,000.  Profits  and  losses  were 
to  be  borne  equally.  At  the  end  of  the  first  year  each  partner  had 
drawn  $1,000.  The  assets  were  then  disposed  of  for  $3,000,  the 
purchaser  discharging  all  liabilities  of  the  firm.  How  should  this 
sum  of  $3,000  be  apportioned  among  the  partners  and  would  any 
of  them  have  to  advance  any  further  sum?  If  so,  state  which 
partner  and  how  much  and  make  up  the  necessary  accounts  to 
show  the  results. 

Problem  99 

Smith  &  Jones  are  partners,  drawing  equal  amounts  for  serv- 
ices, and  sharing  profits  according  to  capital  invested,  after  al- 
lowing 5%  on  capital.  They  require  additional  capital  and  ar- 
range to  admit  the  manager  to  the  firm,  he  to  acquire  a  one-quarter 
interest  in  the  business.  According  to  the  balance  sheet  Smith  has 
$12,000  and  Jones  $6,000  invested,  and  goodwill  is  valued  at 
$6,000.    What  sum  must  the  manager  contribute?    How  will  the 


58 


PROBLEMS    IN    ACCOUNTING 


II 


partnership  accounts  appear  after  payment  into  the  firm  of  the 
new  capital?  How  will  profits  be  divided  in  the  future?  Show 
accounts  in  skeleton  form. 

Problem  100 

A  and  B  of  Colorado  engaged  as  usual  partners  in  a  stock 
raising  enterprise  with  a  capital  of  $10,000,  each  contributing  one- 
half.  A  received  a  salary  of  $200  per  month.  At  the  end  of  three 
years  they  decided  to  terminate  the  business  and  B,  who  handled 
all  the  money  of  the  co-partnership  and  kept  the  books,  reported 
the  following  receipts  and  payments. 

Receipts  Payments 

A's  investment $  5,000    Purchases  of  cattle $57,000 

B's  investment 5,000    Loans  repaid 14,000 

Sales  of  cattle 80,359    A's  salary 4,200 

Loans 15,000    Interest 1,000 

Expenses    9,000 

A's  withdrawals 2,200 

^  B's  withdrawals 1,800 

A  round  up  and  branding  of  the  herd  showed  328  head  worth 
$5,540.  There  remained  with  the  bankers  a  balance  of  $15,150. 
Other  assets  included  horses,  $800;  tools,  etc.,  $100;  supplies, 
$150;  accounts  receivable,  $750.  The  firm  owed  the  following 
bills,  branding  irons,  $40 ;  salt,  $100 ;  loan  at  bank,  $1,000 ;  unpaid 
wages,  $260.  You  are  asked  to  prepare  such  statements  as  are 
necessary  to  show  (a)  the  financial  condition  of  the  co-partner- 
ship at  its  termination;  (b)  the  results  of  the  three  years'  opera- 
tions; and  (c)  the  interest  of  each  partner. 

Problem  101 

A  manufacturer  is  desirous  of  securing  a  partner  and  fur- 
nishes a  statement  covering  five  years'  operations  as  follows: 
Assets  Liabilities 

Buildings $  20,000.00    Accounts  and  Bills 

,^    ,  .  Payable $  30,000.00 

Machmery  and  Fix-  g^j^^     ^^^^^^^     ^^^ 

tures  75,000.00        year 500,000.00 


PROBLEMS     IN    ACCOUNTING  59 

Inventory  Mdse.  and  Wages  paid  per  year  170,000.00 

Supplies   50,000.00    Expense,  Selling  and 

Cash   5,000.00        General,  per  year.     35,000.00 

Accounts  Receivable    40,000.00    Material  Purchased.   260,000.00 
Buildings  are  on  leased  ground,  lease  expires  in  ten  years, 
annual  land  rental  $1,000.00.     Buildings  revert  to  owner  at  ex- 
piration of  lease. 

New  machinery  when  installed  ten  years  ago  cost  $50,000.00. 
Additional  since  cost  $25,000.00 ;  no  depreciation  has  been  charged 
off.    All  repairs  and  replacements  charged  to  expense. 

What,  in  your  opinion,  would  be  a  fair  price  to  be  contributed 
for  a  half  interest  ?    Explain  fully. 

Problem  102 

Robert  Adams  and  William  Stevens  are  equal  partners.  On 
the  night  of  July  3  their  stock  and  fixtures  were  destroyed  by 
fire.  A  trial  balance,  which  Adams  had  at  his  home,  showed  the 
following  condition  of  the  ledger  at  the  close  of  business,  June 
30th: 

Robert  Adams $     600.00        $  5,450.00 

William  Stevens  600.00            7,450.00 

Cash    3,309.00 

Fixtures   1,500.00 

Merchandise  Purchases  32,600.00 

Merchandise  Sales 24,800.00 

Notes  Receivable 1,000.00 

Notes  Payable 4,000.00 

Interest    120.00                 50.00 

Expense   780.00 

Customers  4,500.00 

Creditors  3,259.00 

$45,009.00         $45,009.00 

The  property  is  fully  covered  by  insurance.    The  insurance 

company,  for  the  purpose  of  estimating  the  value  of  the  mer- 


60 


PROBLEMS     IN    ACCOUNTING 


chandise  destroyed,  has  agreed  to  allow  35  per  cent,  as  the  aver- 
age gross  gain  on  the  sales  and  to  pay  66?^  per  cent,  on  the  value 
of  the  fixtures  as  shown  by  the  ledger.  On  the  basis  of  this 
agreement,  state  the  result  of  the  business  and  the  capital  of  each 
partner. 

Problem  103 

A  fire  in  the  office  of  a  firm  of  traders  partly  destroyed  its 
books  of  account  that  had  been  fully  posted  in  anticipation  of 
proving  their  correctness.  The  following  ledger  accounts  were 
found  to  be  legible : 

Purchases  net $23,000 

Cash  discounts  lost 320 

Cash  discounts  gained 1,150 

Sales  net 18,000 

Bills  receivable 11,000 

Upon  inquiry  the  bank  balance  was  ascer- 
tained      43,000 

Bills  receivable  had  been  discounted  at  the 

bank,  amounting  to 15,000 

An  inspection  of  the  checks  paid  by  the  bank 
showed  amount  paid  creditors,  including 
$30,000  notes  payable 33,000 

A  balance  sheet  prepared  at  the  last  closing  of  the  books  and 
containing  the  following  items  was  produced  by  one  of  the  part- 
ners: 

Cash $20,000  Accts.  Pay $10,000 

Accounts  Rec 42,000  Notes  Pay 20,000 

Loans  Rec 8,000  Mortg.  Pay 12,000 

Real  Estate 30,000  Capital 84,000 

Notes  Rec 14,000 

Inventory 12,000 

The  firm  stated  that  the  real  estate,  loans  receivable,  and  mort- 
gages payable  remained  as  shown  in  the  balance  sheet. 

An  inventory  of  goods  in  storage  amounted  to  $15,000. 


PROBLEMS     IN     ACCOUNTING  61 

With  this  information  open  a  new  set  of  books  showing  the 
position  of  the  firm  at  the  time  of  the  fire. 

Problem  104 

Anderson  &  Brooks  are  equal  partners.    Their  balance  sheet 
on  June  30,  1910,  was  as  follows : 

Assets 

Merchandise  Inventory   $35,000.00 

Accounts  Receivable  61,000.00 

Furniture  and  Fixtures 2,500.00 

Cash 500.00 

Investments   3,000.00 

$102,000.00 
Liabilities 

Accounts  Payable 50,000.00 

Bank  Overdraft 15,000.00 

Anderson's  Capital 21,000.00 

Brooks'  Capital 16,000.00 


$102,000.00 

Conway  is  to  enter  the  firm.  Preliminary  thereto  Anderson 
&  Brooks  revise  their  balance  sheet  by  writing  oflF  bad  debts 
amounting  to  $15,000.00;  $500.00  from  furniture  and  fixtures; 
15%  from  inventory;  25%  for  loss  on  investments;  and  estab- 
lish a  good  will  account  of  $5,000.00. 

Conway  pays  in  $5,000.00  as  his  one-third  interest,  to  which 
amount  the  other  parties  agree  respectively  to  adjust  their  capital. 
Any  necessary  adjustment  of  their  capital  accounts  is  to  be  made 
through  their  personal  accounts. 

The  new  firm  name  is  to  be  Anderson,  Brooks  &  Conway. 

Give  the  necessary  journal  entries  and  the  balance  sheet  of 
the  new  firm  at  the  start  of  business. 

Problem  105 

Jack  and  Jill  began  a  partnership  business  January  1,  1920. 
At  the  time  of  closing  the  books,  December  31,  1920,  an  examina- 


62 


PROBLEMS     IN    ACCOUNTING 


tion  of  the  accounts  revealed  the   following  contributions  and 


withdrawals 
Jan. 
May 
June 
Sept. 
Oct. 


capital : 

— ^Jack  paid  in $9,000.00 

—Jack  paid  in 2,400.00 

— ^Jack  drew  out 1,800.00 

— ^Jack  drew  out 2,000.00 

-Jack  paid  in 800.00 


Jan.       1— Jill  paid  in $3,000.00 

Mar.      1— Jill  drew  out 1,600.00 

May      1— Jill  drew  out 1,200.00 

June      1— Jill  paid  in 1,500.00 

Oct.       1— Jill  paid  in 3,000.00 

Their  merchandise  account  was  debit  $32,000.00,  credit 
$27,000.00.  Balance  of  merchandise  on  hand  per  inventory, 
$10,500.00 ;  Cash  on  hand,  $4,900.00 ;  Bills  receivable,  $12,400.00. 
Tom  Piper  owes  on  account  $250.00 ;  Dick  Hubbard  owes  $700.00 ; 
William  Clark  owes  $650.00 ;  J.  Green  owes  $850.00.  The  part- 
ners owe  on  their  notes  $1,890.00.  They  owe  A.  Reed  on  account 
$240.00 ;  C.  Smith  $500.00 ;  A.  Clark  $100.00.  Their  profit  and 
loss  account  shows  before  closing  entries  debit  $866.00,  credit 
$1,520 ;  expense  account  is  debit  $2,520.00.  Commission  account 
is  credit  $2,760.00 ;  interest  is  debit  $480.00,  credit  $950.00.  The 
gain  or  loss  is  to  be  divided  in  proportion  to  each  partner's  capital, 
and  in  proportion  to  the  time  it  was  invested. 

Prepare  (1)  merchandise  account;  (2)  profit  and  loss  ac- 
count closed;  (3)  each  partner's  account;  (4)  balance  sheet. 

Problem  106 

You  are  required  to  make  up  from  the  following  particulars 
a  statement  of  the  capital  accounts  of  each  partner  in  the  firm 
of  Going,  Going  &  Gone  for  the  six  months  ending  December  31, 
1920. 

Profits  are  divisible  in  the  following  proportions:  Going, 
4/10 ;  Going,  3/10 ;  Gone,  3/10.  Interest  at  4%  per  annum  is  to 
be  credited  on  capital.  The  net  profits  before  adjustment  of  in- 
terest are  $24,380.    The  partners  have  drawn  on  the  last  day  of 


PROBLEMS     IN    ACCOUNTING 


63 


each  month  as  follows :  Going,  $500 ;  Going,  $375 ;  Gone,  $375. 
Capital  at  June  30,  1920 :  Going,  $94,500 ;  Going,  $52,500 ;  Gone, 
$43,750.  State  also  if  in  your  view  it  is  necessary  to  charge 
interest  on  drawings  and  give  reasons,  especially  with  respect 
to  this  particular  case. 

Problem  107 

A  partnership  contract  between  A  and  B  provides  that  each 
partner  shall  contribute  $25,000.00  to  a  business,  and  that  on  any 
capital  brought  in  by  either  partner  in  excess  of  this  amount  he 
shall  receive  6%.  A  contributes  $10,000.00  additional  and  the 
bookkeeper  makes  an  entry  in  the  books  at  the  end  of  the  year 
crediting  A  with  $600.00  and  debiting  B.  Is  this  correct?  Give 
reasons. 

Problem  108 

(a)  On  Dec.  31,  1916,  the  balance  sheet  of  X  and  Y,  part- 
ners, in  summary  form  stands  as  follows: 

Merchandise   $20,000  X,  Capital $39,000 

Receivables 30,000  Y,  Capital 20,000 

Cash 10,000  Y,  Drawing 8,000 

X,  Drawing 5,000  Accounts  Payable 3,000 

$65,000  $65,000 

At  this  time  it  is  agreed  that  Z  shall  be  taken  in  as  a  new 
partner,  to  absorb  enough  of  X's  net  interest  and  contribute  suf- 
ficient cash  and  other  property  to  make  all  three,  X,  Y,  and  Z, 
equal  partners.  Z  insists  that  a  long-standing  customer's  ac- 
count amounting  to  $2,000  shall  be  written  oflF  as  worthless.  Z 
then  turns  over  to  the  firm  cash  amounting  to  $6,000,  equipment 
valued  at  $5,000,  and  pays  X  sufficient  cash  to  eflfectuate  the  ar- 
rangement stated  above. 

Prepare  journal  entries  showing  Z's  admission  to  the  firm 
(closing  the  drawing  accounts),  and  exhibit  a  balance  sheet  of 
the  reorganized  partnership. 

(b)  Using  the  balance  sheet  given  under  (a)  above,  assume 
that  Z  buys  X  out  completely,  paying  him  $45,000  cash  and  there- 


in 

Hi 


^mi 


64  PROBLEMS     IN    ACCOUNTING 

by  acquiring  a  three-fifths  interest  in  the  business ;  that  accounts 
receivable  are  adjusted  as  above;  that  X  contributes  no  assets  to 
the  firm ;  and  prepare  journal  entries  and  new  balance  sheet. 

Problem  109 

Dey  &  Knight,  partners  in  a  mercantile  business,  share  profits 
and  losses  equally.  At  the  end  of  five  years  the  partnership  ter- 
minates by  limitation  and  their  balance  sheet  appears  as  follows : 

Assets  Liabilities 

Plant  and  machinery. .  .$15,400  Creditors    $30,000 

Inventory 36,000  Bills  Payable    10,000 

Accounts  Receivable  . .  28,000  Capital 

Cash  in  Bank 5,600  Dey   $30,000 

Knight   15,000 

$45,000 

$85,000  $85,000 

Subsequently  the  business  as  it  stands  (except  cash  in  bank) 
is  sold  to  Twilight  for  $30,000.  Make  final  adjustments  and 
closing  entries  and  show  the  amount  each  partner  receives. 

Problem  110 

Dock  and  Dolton  are  partners  sharing  losses  and  gains  equally. 
Dock  has  invested  $3,000,  Dolton  $4,000.  They  are  ready  to 
wind  up]  the  business.  The  firm  owes  $5,000,  of  which  $1,000  is 
due  Dock  and  $500  is  due  Dolton,  both  on  loan  accounts.  They 
have  $7,000  in  cash.     Prepare  closing  statement. 

Problem  111 

On  buying  an  interest  in  a  partnership,  what  entries  should 
be  made  in  the  books  of  the  business? 

(a)  When  a  direct  sale  is  made  of  an  interest,  the  money  not 
to  be  used  in  the  business? 

(b)  When  the  money  paid  for  the  interest  in  the  business  is 
to  be  used  in  the  business? 

In  answering  assume  three  cases:  (1)  the  capital  interest 
acquired  is  the  same  as  the  payment  made;  (2)  is  larger  than  the 


PROBLEMS     IN     ACCOUNTING  65 

payment;  (3)  is  smaller.     Consider  both  with  and  without  good- 
will, where  possible. 

Problem  112 

X,  Y,  and  Z  were  partners  and  had  contributed  the  follow- 
ing capital:  X,  $8,000,  Y,  $6,000,  and  Z,  $4,000.  Profits  and 
losses  were  to  be  shared  equally.  At  the  end  of  the  year  each 
partner  had  drawn  $1,000.  The  assets  were  then  disposed  of  for 
$3,000,  the  purchaser  discharging  all  the  liabilities  of  the  firm. 

Prepare  a  statement  of  the  partners'  accounts  after  dividing 
the  $3,000  received  from  the  purchaser. 

Problem  113 

L,  M,  N,  and  O  enter  into  partnership  with  a  capital  of 
$100,000.  L  invests  $40,000;  M,  $30,000;  N,  $20,000,  and  O, 
$10,000.  They  are  to  share  profits  and  losses  in  the  following 
ratios:  L,  35%;  M,  28%  ;  N,  22%;  and  O,  15%.  At  the  end 
of  six  months  there  is  a  loss  of  $8,000.00,  and  meantime  the  part- 
ners have  drawn  against  prospective  profits  as  follows :  L,  $400 ; 
M,  $600 ;  N,  $600 ;  and  O,  $400. 

The  partners  dissolve  and  agree  to  distribute  the  proceeds  of 
the  firm's  assets  monthly,  as  realized.  The  realization  and  liquida- 
tion lasts  four  months  and  the  transactions  are  as  follows,  sum- 
marized : 

Expenses 

Assets  Liabilities  and  Losses 

Month                    Realized  Liquidated  on  Realization 

First    $30,190.00  $7,900.00  $    400.00 

Second    50,300.00  6,100.00  750.00 

Third   20,010.00  3,800.00  340.00 

Fourth    9,500.00  2,200.00  110.00 

$110,000.00  $20,000.00  $1,600.00 

Prepare  a  statement  of  the  partners'  accounts  showing  the 
amount  payable  monthly  to  each  one.  Make  up  these  accounts  in 
tabular  form,  as  follows: 


if 


66  PROBLEMS    IN    ACCOUNTING 

Total  L  M  N  O 

Original  capital.  .$100,000    $40,000.    $30,000    $20,000    $10,000 

Problem  114 

Higbsy  and  Hodge  purchased  at  a  forced  sale  merchandise 
and  fixtures  of  two  stores  for  $40,000.00,  Higbsy  taking  a  2/5 
interest  and  Hodge  a  3/5  interest.  Gains  and  losses  are  to  be 
shared  accordingly.  Higbsy  takes  charge  of  one  store  and  Hodge 
of  the  other,  each  keeping  a  bank  account  in  his  own  name.  Dur- 
ing the  year  Higbsy  receives  $35,450.00  in  cash,  and  pays  out 
$27,775.00,  while  Hodge  receives  $42,225.00  and  pays  out  $55,- 
710.00.  The  business  is  then  sold  for  $52,500.00  cash,  which  is 
deposited  to  their  joint  account.  Prepare  a  statement  showing  the 
amount  due   each  partner. 

Problem  115 

A,  B,  and  C  were  partners  sharing  profits  and  losses  equally. 
After  closing  the  books  on  December  31,  1920,  the  capital  ac- 
counts were  as  follows : 

A $30,000 

B   15,000 

C  5,000 

The  assets  were  carried  on  the  books  at  the  following  values : 
land,  $5,000;  buildings,  $60,000;  cash,  $2,000,  and  other  assets, 
$13,000.  The  liabilities  totaled  $30,000.  The  building  was  old 
and  no  depreciation  had  been  charged  off.  It  was  insured  for 
$40,000.  The  building  was  totally  destroyed  by  fire.  The  in- 
surance company  paid  the  face  of  the  policy,  and  the  partners  de- 
cided to  liquidate.  The  land  was  sold  for  $7,000  and  the)  other 
assets  for  $10,000.  Prepare  a  statement  showing  the  partners* 
capital  accounts,  and  state  the  disposition  of  the  cash  accumulated 
with  the  above  transactions. 

Problem  116 

The  following  is  the  balance  sheet  of  A  and  B,  equal  part- 
ners: 


PROBLEMS    IN    ACCOUNTING 


67 


Assets  Equities 

Cash $  1,000  Accounts  Payable $  5,000 

Accounts  Receivable  ..  10,000  Notes  Payable  7,000 

Merchandise   5,000  A,  Capital 10,500 

Bldg.  and  Equip 17,000  B,  Capital  10,500 


$33,000  $33,000 

What  is  the  amount  of  proprietorship  according  to  this  state- 
ment? 

The  firm  needs  more  capital  and  C  is  invited  to  become  a 
partner.  C  investigates  the  situation  and  finds :  that  of  the  out- 
standing accounts  probably  $1,000  will  never  be  collected;  that 
the  merchandise  account  should  be  written  down  $500  on  account 
of  shop  wear  and  obsolescence;  that  accrued  depreciation  on 
building  and  equipment  totals  $1,500  and  has  never  been  booked. 
He  oflFers  to  invest  cash  sufficient  to  give  him  a  one-fourth  interest 
on  the  basis  of  the  corrected  values  as  above  outlined.  A  and  B 
agree  to  this  proposition. 

Present  journal  entries  which  give  effect  to  the  new  valua- 
tion and  C's  investment  and  exhibit  the  new  balance  sheet  after 
these  entries  are  made. 

Problem  117 

From  the  books  of  Messrs.  Deakon  &  Elder,  which  are  kept 
by  single  entry,  the  following  balance  sheet  as  of  June  30,  1920, 
was  taken: 

Assets  Liabilities 

Cash  on  Hand   and  in  Accounts  Pay $10,309 

Bank  $10,800  Capital  Accounts : 

Accounts  Rec 16,032      Deakon  . . .  .$  3,263 

Inventories  29,980      Elder 61,240 

Bldgs.  and  Equip 8,000  $54,503 


$64,812  $64,812 

It  was  agreed  that  the  partnership  would  be  dissolved  Octo- 
ber 31,  1920,  but  that  Elder  would  continue  in  business.    It  was 


4 


68  PROBLEMS     IN     ACCOUNTING 

further  agreed  that  Deakon  would  be  paid  the  balance  at  his  credit 
June  30,  1920,  together  with  the  sum  of  $5,000  to  cover  his  inter- 
est in  the  good  will  of  the  business  and  his  profits  up  to  October 
31,  1920.  The  latter  was  estimated  to  be  $1,200.  From  this 
amount,  however,  his  drawings,  amounting  to  $8Q0,  were  to  be 
deducted.  Payment  to  Deakon  in  accord  with  the  above  was 
made  October  31,  1920. 

The  following  balances  were  shown  on  the  books  June  30, 
1921: 

Assets  Liabilities 

Cash  in   Bank   and   on  Accounts  Pay $8,706 

Hand    $  8,310 

Accounts   Rec 12,203 

Inventories    29,143 

Bldgs.  and  Equip 8,103 

You  ascertain  that  on  April  30,  1921,  merchandise  valued  in 
the  books  at  $500  was  destroyed  by  fire.  Since  this  loss  is  not 
covered  by  insurance,  Mr.  Elder  reduced  the  book  value  of  his 
inventory  to  take  care  of  the  loss. 

The  additions  to  buildings  and  equipment  during  the  year  cost 
$503,  but  the  book  value  of  these  assets  was  reduced  by  the  sum 
of  $400  to  adjust  for  depreciation. 

Elder's  personal  drawings  during  the  year  amounted  to 
$2,500. 

You  are  required  to  prepare  a  balance  sheet  for  Elder  as  of 
June  30,  1921,  together  with  a  statement  showing  profit  and  loss 
for  the  year,  and  the  distribution  thereof:  You  are  also  to  write 
up  Elder's  capital  account  for  the  year  to  June  30,  1921. 

No  value  is  to  be  put  upon  good-will. 

Problem  118 

Four  equal  partners,  W,  X,  Y,  and  Z,  agreed  to  sell  their 
business  to  a  corporation.  Their  assets  and  liabilities  were  as 
follows:  W,  capital,  $145,500;  X,  capital,  $123,500;  Y,  capital, 
$153,000;  Z,  capital,  $152,330;  building,  $125,000;  machinery, 
fixtures,  etc.,  $38,335 ;  stock,  $150,940 ;  accounts  receivable,  $328,- 


*) 


) 


PROBLEMS     IN     ACCOUNTING 


69 


680;  bills  receivable,  $37,005; 'cash,  $17,030;  horses  and  wagons, 
$1,230 ;  unexpired  insurance,  $175 ;  accounts  payable,  $124,065. 

A  further  agreement  was  made  that  the  partners  were  to  be 
paid  for  goodwill,  based  on  a  year  and  a  quarter's  purchase  of  the 
last  three  years*  profits,  which  were  respectively  $32,620,  $37,450 
and  $50,650. 

Prepare  a  balance  sheet,  bringing  in  goodwill  as  an  assel 
and  distributing  it  among  the  four  partners. 

Problem  119 

The  firm  of  Hohenzollern  &  Ludendorf  began  business  on 
January  1,  1920,  the  terms  of  the  partnership  contract  specifying 
that  no  interest  was  to  be  credited  on  the  investments  or  charged 
on  withdrawals,  and  all  profits  or  losses  were  to  be  shared  equally. 
Hohenzollern  invested  $24,000  and  Ludendorf  $15,000.  The  books 
had  not  been  closed,  and  all  drawings  had  been  charged  to  the 
capital  accounts. 

On  November  30,  1922,  the  partnership  was  dissolved,  and 
since  the  books  had  not  been  properly  kept,  the  following  state- 
ment was  submitted  to  the  partners  as  a  basis  for  settlement  and 
agreed  to  by  them:  cash,  $14,200;  net  debit  of  A,  $6,300;  ex- 
penses, $15,300 ;  net  credit  of  B,  $10,500 ;  profit  and  loss,  debit, 
$9,000,  credit,  $1,500;  real  estate  having  an  estimated  market 
value  of  $3,300;  the  bank  holds  the  firm's  six  months'  6%  note 
for  $10,000,  due  January  31,  1923,  on  which  interest  is  unpaid. 

Hohenzollern  liquidated  the  assets  and  liabilities,  and  in  due 
course  sold  the  real  estate  for  $4,000,  and  paid  off  the  note  when 
due. 

Prepare  the  partners'  accounts  as  of  November  30,  1921,  and 
as  of  the  close  of  liquidation,  and  statement  of  condition  Novem- 
ber 30,  1921. 

Problem  120 

A  business  is  owned  by  two  partners,  Hangon  &  Winnout, 
who  share  profits  and  losses  on  the  basis  of  2/3  and  1/3  re- 
spectively.    They  decide  to  sell  a  J4  interest  in  the  business  to 


m 
m 

Ml 


70  PROBLEMS     IN    ACCOUNTING 

Kant,  the  amount  he  pays  therefor  to  remain  invested  in  the  busi- 
ness. He  is  admitted  into  the  firm  on  June  30,  1918,  and  on  that 
date  their  books  are  closed.  Hangon's  capital  account  shows  a 
credit  balance  of  $40,000,  and  Winnout*s  capital  account  shows 
a  credit  balance  of  $12,000.  The  parties  at  interest  agree  that  the 
net  worth  of  the  business  is  $78,000.  Kant  is  to  be  entitled  to  % 
of  the  profits,  and  the  remainder  is  to  be  divided  between  Hangon 
and  Winnout  in  their  former  ratio. 

Make  journal  entries  for  admission  of  Kant. 
During   the   year    Hangon's    loan    is    repaid    with    interest 
amounting  to  $400,  and  the  partners  draw  as  follows: 

Hangon $2,000 

Winnout   1,600 

Kant  1,000 

At  the  end  of  the  year  the  business,  including  goodwill,  is 
sold  for  $100,000.  Prepare  a  statement  of  the  capital  accounts 
after  distributing  the  $100,000. 

Problem  121 

A,  B,  and  C  engage  in  business,  A  contributing  $10,000  cap- 
ital, B  $5,000,  and  C  undertakes  to  take  the  active  management  at 
a  salary  of  $3,000  a  year,  to  be  paid  to  him  monthly.  After  pro- 
viding 5  per  cent  interest  on  capital  they  are  to  divide  the  net  re- 
sults in  the  proportions  of  5,  3,  and  2.  At  the  end  of  18  months 
they  ascertain  the  position  to  be  unfavorable  and  decide  to  wind 
up.  The  assets  are  agreed  to  be  worth  $12,500,  of  which  A  takes 
$10,000,  and  B  $2,500.  There  are  no  liabilities  except  for  the 
capital  and  simple  interest  thereon,  and  one  month's  salary  due  C. 
State  the  position  of  the  three  partners  to  each  other. 

SECTION  IV.    Corporation  Accounting. 

The  special  problems  of  corporation  accounting  grow  out  of 
the  legal  separation  of  the  business  entity  and  the  personnel  of 
its  owners.  In  some  cases  it  is  important  for  the  accountant  to 
proceed  as  if  the  corporation  were  a  distinct  economic  as  well  as 
legal  individual ;  in  others  it  is  equally  important,  if  he  would  be 


PROBLEMS     IN     ACCOUNTING 


71 


accurate,  for  him  to  brush  aside  the  so-called  legal  fiction,  to  look 
beneath  the  purely  nominal  capitalization,  and  to  make  his  entries 
in  accord  with  the  actual  facts.  Considerable  time  will  be  spent 
reading  and  discussing  sound  authorities  with  special  regard  paid 
to  the  problem  of  the  various  stock  issues  (par  and  non-par),  of 
treasury  stock  (including  "donated  stock"),  of  defaulted  sub- 
scriptions and  assessments,  of  non-cash  dividends,  of  the  position 
of  the  various  equities  in  dissolution,  and  the  like. 

The  student  should  make  sure  he  understands  the  general 
nature  of  these  problems  and  the  precise  meaning  of  the  terms  em- 
ployed before  attempting  a  solution  of  a  specific  problem  case. 

Problem  122 

What  are  some  of  the  problems  connected  with  the  issue  of 
corporate  "par"  stock  for  property?  This  assumes  that  the  busi- 
ness of  the  accountant  is  to  show  facts. 

Problem  123 

Describe  the  method  of  determining  the  number  of  shares 
of  capital  stock,  both  common  and  preferred,  held  by  each 
of  the  several  stockholders  of  a  corporation,  giving  fully  the 
titles  of  the  books  wherein  the  facts  are  registered  and  stating 
how  the  books  are  opened  and  operated. 

Problem  124 

The  Royal  Manufacturing  Company  has  been  organized 
with  an  authorized  capitalization  of  $500,000  (all  common 
stock).  $420,000  of  the  stock  has  been  subscribed  for,  of 
which  $120,000  was  paid  in  cash  and  $200,000  in  property. 
The  remainder  is  to  be  paid  in  four  equal  installments.  The 
first  installment  has  been  called  for  and  collected.  Make  the 
original  entries  covering  the  above  transactions. 

Problem  125 

How  do  the  accounts  of  a  corporation  and  of  a  partner- 
ship differ  in  the  statement  of 


' 


:!" 


Vii 


73  PROBLEMS     IN     ACCOUNTING 

(a)  Investments. 

(b)  Operation    of    business    and    determination    of 

profits. 

(c)  Division  and  distribution  of  profits. 

Problem  126 

Distinguish  between  the  following: 

(a)  Capital  stock  authorized. 

(b)  Treasury  stock. 

(c)  Donated  stock. 

(d)  Stock  outstanding. 

On  which  side  of  the  balance  sheet  will  each  appear? 

Problem  127 

The  Domestic  Manufacturing  Company,  organized  with 
a  Capital  Stock  of  $5,000,000,  half  preferred  and  half  com- 
mon, sells  five  shares  of  common  stock  at  par  for  cash.  It 
issues  to  John  Jones  $1,500,000  preferred  stock  and  $1,000,000 
common  stock  in  consideration  of  the  assignment  by  him  of 
certain  rights,  patents,  and  contracts.  Later  Jones  agrees 
to  surrender  for  valuable  consideration  to  the  treasurer  of 
the  Domestic  Manufacturing  Company  $1,000,000  common 
stock  and  $500,000  preferred  stock.  Still  later  Jones  agrees 
to  surrender  to  the  Domestic  Manufacturing  Company  $1,000,- 
000  preferred  stock  and  take  in  lieu  thereof  $1,000,000  com- 
mon stock.  Jones  makes  a  further  agreement  with  the  com- 
pany to  deliver  to  it  all  the  stock  in  the  Blank  Manufacturing 
Company,  appraised  at  $350,000,  and  to  pay  the  Domestic 
Manufacturing  Company  $150,000,  for  which  he  is  to  receive 
$500,000  in  preferred  stock  of  the  Domestic  Manufacturing 
Company. 

Illustrate  by  journal  entries  the  necessary  accounts  to 
be  opened  on  the  books  of  the  Domestic  Manufacturing  Com- 
pany to  show  each  step  in  the  foregoing  agreement. 


PROBLEMS     IN     ACCOUNTING 


73 


I 


T 


Problem  128 


The  Elk  Run  Tanning  Company  has  been  organized 
under  the  laws  of  Pennsylvania  with  an  authorized  capitali- 
zation of  $500,000,  all  common  stock,  par  value  $100.  The 
five  incorporators  subscribe  and  pay  cash  for  fifty  shares  each 
at  face  value.  F.  W.  Coulter  purchases  the  tannery  now 
being  operated  by  Thos.  Keck  &  Son,  paying  for  the  com- 
plete plant  $475,000,  and  transfers  the  same  to  the  newly 
incorporated  company  for  the  remaining  common  stock  and 
$100,000  of  first  mortgage  5%  bonds. 

Make  the  opening  journal  entries. 

Problem  129 

The  following  are  subscriptions  for  stock  in  the  Red 
Jacket  Mining  Co.:  George  C.  Goodwin,  500  shares;  S.  V. 
Burnett,  250  shares;  T.  A.  Mulholland,  1,000  shares;  O.  D. 
Hodgdon,  750  shares,  and  Charles  Bridges,  1,500  shares. 

The  first,  second  and  third  installments  of  25%  each  have 
been  called  and  paid.  The  stock  certificates  are  issued  to 
subscribers  on  payment  of  the  first  installment,  each  install- 
ment being  recorded  on  the  back  of  the  certificate. 

Jan.  1.     Mulholland  sells  100  shares  to  Bridges. 

Jan.  2.     Hodgdon  sells  200  shares  to  Bridges. 

Jan.  3.     Burnett  sells  250  shares  to  Goodwin. 

Jan.  4.  Bridges  donates  50  shares  to  the  company  to  be 
sold  for  the  purpose  of  acquiring  additional  working  capital. 

Show  all  necessary  entries  on  the  books  of  the  company. 

Problem  130 

Three  brothers,  A,  B,  and  C,  own  all  the  capital  stock 
(each  >^)  of  a  certain  corporation  X.  They  own  also,  but 
not  equally,  55%  of  the  capital  stock  of  a  kindred  corporation 
Y,  which  is  capitalized  for  $100,000,  the  par  value  of  the 
shares  being  $10.    The  holdings  of  each  in  the  Y  corporation 


i 


74  PROBLEMS     IN     ACCOUNTING 

are  as  follows:  A,  2,222  shares;  B,  2,222  shares;  C,  1,056 
shares. 

The  three  brothers,  acting  as  the  corporation  X,  purchase 
out  of  corporate  funds  the  remaining  45%  interest  in  the 
corporation  Y,  paying  $100,000  therefor.  Without  further 
cost  to  X  they  now  wish  to  merge  the  two  corporations  under 
the  corporate  name  X  and  to  dissolve  Y. 

C  proposes  to  make  compensation  to  A  and  B  individually 
for  an  equal  interest  in  the  5,500  shares  upon  the  same  basis 
as  the  45%  interest  was  acquired,  so  that  all  may  share  equally 
in  the  merged  properties. 

(1)  How  much  should  C  pay  to  each  of  the  other  stock- 
holders ? 

(2)  Outline  the  entries  necessary  to  record  all  the  above 
stated  transactions  on  the  books  of  X  and  Y. 

Problem  131 

Prepare  a  working  sheet.  Allow  5%  depreciation  on 
plant  and  machinery  for  the  year.  Allow  2%  for  Reserve  for 
Bad  Debts  on  Accounts  and  Notes  Receivable  for  the  year. 

Bedford  Shoe  Co. 
Trial  Balance,  Dec.  31,  1911 

Capital  Stock $250,000.00 

Surplus,  Jan.  1,  1911  142,000.00 

Reserve  for  Depreciation  on  Plant  and 

Machinery,  Jan.  1,  1911 20,000.00 

Reserve  for  Bad  Debts,  Jan.  1,  1911. .  9,600.00 

Inventory,  finished  goods,  Jan.  1,  1911.$  32,000.00 
Inventory,  Raw  Material,  Jan.  1,  1911.     45,000.00 

Purchases  135,000.00 

Sales 379,680.00 

Discounts  on  Purchases 1,730.00 

Discounts  on  Sales 2,500.00 

Goods  Returned   3,650.00 

Wages  135,500.00 

Power,  Heat  and  Light 17,000.00 


I 


f 


PROBLEMS     IN     ACCOUNTING  75 

Repairs  for  Machinery  2,800.00 

Factory  Expense 9,500.00 

Insurance  Expense 2,200.00 

Plant  and  Machinery 125,000.00 

Salaries   37,000.00 

Notes  and  Accounts  Receivable 200,000.00 

Notes  and  Accounts  Payable 30,000.00 

Furniture  and  Fixtures 4,000.00 

Cash   75,500.00 

Taxes    960.00 

Advertising 6,400.00 

$833,010.00    $833,010.00 
Inventories  on  Dec.  31,  1911  : 

Finished  Goods $16,000.00 

Raw  Material 10,700.00 

Furniture  and  Fixtures 3,580.00 

Problem  132 

Messrs.  Sharp  &  Flat,  partners,  engaged  in  manufactur- 
ing, decide  to  form  a  business  corporation  under  the  laws  of 
New  York,  under  the  name  of  The  Sharp  &  Flat  Manufac- 
turing Company,  having  an  authorized  capital  of  $100,000. 
The  corporation,  in  consideration  of  the  entire  issue  of  capital 
stock,  purchased  all  of  the  assets  and  assumed  all  of  the  lia- 
bilities of  the  partnership  as  shown  by  the  following  balance 
sheet  dated  May  31,  1900.  Sharp  &  Flat  take  all  the  stock 
except  five  shares,  par  value  $100  each,  issued  to  incorporators 
for  cash  subscriptions. 

Balance  Sheet — May  31,  1900 
Assets 

Plant  and  machinery  $35,000 

Stock  on  hand  per  inventory 20,525 


l; 


76 


PROBLEMS     IN     ACCOUNTING 


Accounts  receivable   22,750 

Bills  receivable 1,500 

Cash    5,225 

Total  assets $85,000 

Liabilities 

Sharp's  capital   $42,500 

Flat's  capital 36,300 

Accounts  payable 5,250 

Bills  payable 700 

Wages  due  and  unpaid 250 

Total  liabilities $85,000 

During  the  first  year  of  the  corporation's  existence,  the 
books  were  kept  in  the  same  manner  as  during  the  partner- 
ship. Soon  after  the  end  of  the  first  fiscal  year,  however,  a 
certified  public  accountant  was  presented  with  the  following 
trial  balance  showing  the  condition  of  the  books  May  31,  1901, 
and  was  requested  to  open  a  new  set  of  books  for  the  corpora- 
tion, covering  the  operations  of  the  business  during  the  past 
year,  and  to  prepare  therefrom  an  expense  and  revenue  account 
and  balance  sheet: 

Trial  Balance— May  31,  1901 

Sharp's  capital  $  42,500 

Flat's  capital 36,300 

Plant  and  machinery $  37,500 

Stock  on  hand  per  inventory  May  31,  1900.      20,525 

Sales   131,405 

Purchases:  materials  and  supplies 48,000 

Labor    34,500 

Office  salaries 7,000 

Traveling  expenses  2,400 

Interest 600 

Stationery  and  printing 175 

Rent  and  taxes   4,200 

Discounts  and  allowances 2,250 


PROBLEMS     IN     ACCOUNTING 

Fuel  4,600 

Insurance   175 

Freight  (inward)  1,750 

Commission   6,375 

Advertising  500 

Bills  receivable  6,115 

Bills  payable 

Accounts  receivable    36,115 

Accounts  payable 

Cash 6,375 


77 


1,100 

7,850 


$219,155     $219,155 

Draft  the  opening  journal  entries  necessary  to  give  effect 
to  the  above,  prepare  an  income  and  profit  and  loss  account 
and  a  balance  sheet  as  at  May  31,  1901. 

(a)  depreciation  5%  on  plant  and  machinery,  (b)  unex- 
pired insurance  $75,  (c)  bad  debts  $325,  (d)  inventory,  stock 
on  hand  May  31,  1901,  $19,605. 

Problem  133 

"Treasury  stock  or  bonds  are  merely  so  many  legalized 
pieces  of  paper,  and  cannot  in  any  sense  be  considered  as 
assets  of  the  corporation  creating  and  issuing  them"  (Dickin- 
son).   Defend. 

Problem  134 

The  Elite  Amusement  Company  was  organized  on  Jan- 
uary 1,  1912,  with  an  authorized  capital  stock  of  $1,000,000. 
The  stock  was  all  subscribed  for  at  90,  to  be  paid  in  three 
annual  installments.  The  first  two  installments  were  duly 
called  for  and  paid  in  full,  with  the  exception  of  one  block 
of  ten  shares,  on  which  the  subscriber  defaulted  after  paying 
the  first  installment.  It  was  decided  to  hold  these  shares  in 
the  treasury. 

Make  journal  entries  necessary  to  record  correctly  each 
of  the  above  named  steps. 


i 


78 


PROBLEMS    IN    ACCOUNTING 


Problem  135 

A  corporation  agrees  to  purchase  a  mine,  issuing  $500,000 
full  paid  stock  in  payment.  The  stock  is  issued  to  the  owner 
of  the  mine,  with  the  agreement  that  he  donate  to  the  com- 
pany $200,000  of  the  stock  to  provide  working  capital.  $60,000 
of  this  stock  is  sold  at  60%  of  par;  $100,000  at  60%;  and 
$40,000  at  70%. 

(a)  Make  all  entries  necessary  to  show  these  transac- 
tions, all  subscriptions  being  paid  in  cash. 

(b)  Show  the  balance  sheet  as  it  will  stand  after  these 
transactions. 

Problem  136 

A,  B  and  C  constitute  a  firm  engaged  in  a  manufacturing 
business,  which  they  have  decided  to  change  into  a  stock 
company  with  a  capital  of  $100,000,  equally  divided  into  com- 
mon and  preferred  stock,  par  value  $100  for  each  share.  Each 
partner  is  to  take  stock  to  the  amount  of  his  net  investment 
in  the  business,  on  the  basis  of  75  per  cent  preferred  and  25 
per  cent  common  stock  and  the  remaining  shares  authorized 
are  to  be  oifered  for  sale. 

On  taking  over  the  business  the  books  of  the  firm  show 
assets  as  follows:  real  estate,  $25,000;  machinery  and  tools, 
$10,000 ;  merchandise,  $15,000 ;  materials  and  supplies,  $8,000 ; 
cash,  $5,000;  notes  receivable  $3,000;  accounts  receivable, 
$9,000.  The  liabilities  are:  notes  payable,  $10,000;  accounts 
payable,  $5,000 ;  A,  $25,000 ;  B,  $20,000,  and  C,  $15,000. 

Formulate  the  necessary  entries  to  close  the  books  of  the 
firm  and  to  open  the  books  of  the  new  corporation. 

Problem  137 

On  January  1,  1920,  the  condition  of  a  small  trading  com- 
pany as  determined  by  an  examination  of  that  date  was  as 
follows : 


PROBLEMS    IN    ACCOUNTING  79 

Furniture  and  Fixtures. $  2,000  Capital  Stock $  5,000 

Cash 500  Notes  Payable 3,000 

Notes  Receivable 3,000  Accts.  Payable 6,000 

Accounts  Receivable  . .     5,000  Surplus   500 

Merchandise  on  Hand.    4,000 

Total    $14,500        Total   $14,500 

During  the  month  of  January  the  bookkeeper  made  all 
entries  in  the  cash  book  and  in  the  sales  book,  but  made  no 
journal  entries  and  did  not  post  his  ledger.  In  addition  to 
the  entries  appearing  on  the  cash  book  and  sales  book  the 
following  transactions  took  place  during  January :  Merchan- 
dise purchased  on  credit  amounting  to  $6,000;  notes  payable 
amounting  to  $2,000  renewed ;  special  allowances  of  $500  made 
to  customers. 

The  credit  sales  journal  had  two  columns,  one  for  the 
billed  amounts  and  the  other  for  the  cost  of  the  goods  sold. 
The  billed  amount  was  $8,000  and  the  cost  was  $5,000. 

The  following  statement  gives  a  summary  of  the  cash 
receipts  and  disbursements  for  January: 

Cash  Received 

Collected  from  customers   $4,000 

Collected  on  notes  receivable 2,000 

Collected  on  Mdse.  sold  and  not  entered  in  sales' 

book  (cost  price  $500) 600 

Total  cash  received $6,600 

Cash  Payments 

Interest  on  notes  payable $     45 

Salaries   500 

Rent 200 

Sundry  expenses 300 

Accounts  payable 5,000 

Total  disbursements $6,045 


ft 


80 


PROBLEMS     IN     ACCOUNTING 


Prepare  balance  sheet  as  of  January  31,  1915,  and  a  state- 
ment of  profit  and  loss  based  on  the  book  value  of  the  mer- 
chandise. 

Problem  138 

A  corporation  receives  subscriptions  for  stock  to  the 
amount  of  $100,000  at  120.  The  amount  is  paid  in  cash.  What 
entries  should  be  made  for  these  transactions? 

Another  $100,000  is  subscribed,  to  be  paid  in  five  install- 
ments, at  120.  When  two  of  the  installments  have  been  paid, 
what  entries  should  have  been  made  for  the  transactions  of 
this  subscription? 

A  financial  panic  occurs  and  the  last  installment  is  de- 
faulted by  the  subscribers  to  the  amount  of  one-twentieth 
of  the  total  subscription,  a  default  of  $1,200  (thus  forfeiting 
$4,000  of  par  value  and  $800  of  premium  already  paid  in  by 
them  in  installments),  but  the  other  subscriptions  are  paid 
and  the  stock  is  issued.  What  entries  should  be  made  to 
record  all  these  transactions.     Show  the  final  trial  balance. 

Problem  139 

Three  manufacturers,  each  having  an  independent  busi- 
ness and  wishing  to  effect  a  consolidation  of  their  respective 
interests,  organize  the  United  States  Manufacturing  Com- 
pany, a  corporation  with  an  authorized  capital  stock  of  $1,500,- 
000,  half  common  and  half  preferred.  They  sell  to  the  new 
corporation  all  of  their  real  estate,  buildings,  machinery,  tools, 
fixtures,  merchandise  and  supplies,  in  consideration  of  $1,500,- 
000,  and  agree  to  accept  in  payment  $750,000  preferred  and 
$750,000  common  stock  of  the  new  corporation.  The  three 
vendors  then  donate  to  the  treasury  of  the  corporation  $150,- 
000  of  preferred  and  $150,000  of  common  stock  to  provide 
for  working  capital.  The  company  sells  $100,000  of  its  pre- 
ferred stock  in  the  treasury  for  80%  cash,  giving  a  bonus  to 
the  purchaser  of  20%  in  common  stock. 


PROBLEMS     IN    ACCOUNTING 


81 


For  the  purpose  of  raising  additional  funds  for  improve- 
ments and  additions  to  plant,  the  corporation  mortgages  its 
real  estate  and  buildings  as  security  for  an  issue  of  bonds 
amounting  to  $250,000.  These  bonds  the  company  sells  to 
bankers  at  90%,  giving  as  a  bonus  10%  of  preferred  stock 
and  20%  of  common  stock. 

Draft  entries  to  express  correctly  the  above  transactions 
on  the  books  of  the  corporation,  and  prepare  a  statement  of 
assets  and  liabilities  of  the  company. 

Problem  140 

The  balance  sheet  of  A  and  B,  equal  partners,  stands  as 
follows  just  before  the  firm  is  taken  over  by  a  corporation : 
Assets  Equities 

Real  Estate  and  Imp. $64,500    A,  Capital $30,000 

Merchandise 15,900     B,  Capital 30,000 

Customers'  Accounts..     6,000    Accounts  Payable 7,800 

Cash, 2,600     Notes  Payable 20,200 


$88,000  $88,000 

The  new  corporation  receives  all  the  assets  except  the 
cash  and  assumes  the  accounts  payable,  but  not  the  notes 
payable.  Real  estate  and  improvements  are  taken  over  at  a 
value  of  $100,000,  and  the  goodwill  of  the  partners  is  con- 
sidered to  be  worth  $24,500.  Payment  is  made  to  the  partners 
as  follows:  Cash,  $33,100;  bonds  of  the  corporation  $50,000, 
and  the  balance  in  capital  stock  of  the  corporation. 

Give  the  journal  entries,  with  explanations,  necessary  to 
close  the  books  of  the  firm.  (Assume  that  the  valuations 
which  the  corporation  sets  upon  the  firm's  real  estate  and 
goodwill  are  bona  fide.)  Give  opening  entries  on  the  books 
of  the  corporation. 

Problem  141 

Why  is  it  desirable  that  the  several  states  should  pass 
a  law  permitting  incorporation  with  shares  without  a  nom- 


82 


PROBLEMS     IN    ACCOUNTING 


inal  or  par  value  ?  How  would  a  share  of  non-par  stock  read  ? 
How  would  you  determine  the  book  value  of  your  non-par 
holdings  from  the  data  given  in  your  company's  balance 
sheet?  See  if  you  can  find  the  provisions  of  the  New  York 
company  law  with  regard  to  non-par  stock. 

Problem  142 

Name  the  different  pecuniary  values  which  a  share  of 
stock  may  be  said  to  have  and  explain  why  they  are  usually 
different. 

Problem  143 

Define  a  dividend,  being  sure  you  consider  non-cash  as 
well  as  cash  dividends.  Would  you  treat  all  non-cash  divi- 
dends as  being  homogeneous? 

Problem  144 

Give  some  examples  of  the  various  kinds  of  preferred 
stock.     State  clearly  the  proprietary  position  of  each. 

Problem  145 

What  IS  "Founders"  stock?  Look  up  its  position  in 
respect  to  income  and  control. 

Problem  146 

In  its  prospectus  a  corporation  represents  that  it  has  an 
issue  of  "Cumulative,  Non- voting.  Non-participating,  6%  Pre- 
ferred Stock."  Give  your  interpretation  of  this  expression, 
assuming  a  going  concern,  assuming  failure  and  dissolution. 

Problem  147 

A  corporation's  capitalization  consists  of  10,000  shares 
of  cumulative  7%  preferred  stock,  and  5,000  shares  of  com- 
mon stock,  both  classes  of  a  par  value  of  $50  per  share,  all 
of  which  was  issued  July  1,  1912,  the  date  of  incorporating. 
The  corporation  has  paid  ten  dividends  of  5%  each  on  the 


PROBLEMS    IN    ACCOUNTING  83 

preferred  stock.  In  rendering  the  certified  balance  sheet  as 
of  June  30,  1922,  what  consideration  should  be  given  to  the 
foregoing,  and  why? 

Problem  148 

On  December  31,  1921,  the  balance  sheet  of  the  Kaydo 
Rug  Company  was  as  follows: 

Dr.  Cr. 

Real  Estate $   100,000 

Buildings 175,000 

Plant  and  Equipment 250,000 

Inventories 500,000 

Accounts   Received    350,000 

Cash  in  banks  75,000 

Cash  on  hand  6,000 

Interest  and  Insurance  Prepaid 7,600 

Capital   Stock    $   300,000 

Accounts  Payable  160,000 

Notes  Payable 650,000 

Taxes  and  Interest  accrued 15,000 

Surplus    347,600 


$1,462,500  $1,462,500 
Owing  to  certain  difficulties  involved  in  conducting  busi- 
ness under  the  charter  of  the  incorporating  state,  it  was 
decided  to  transfer  the  entire  business  to  another  corporaition 
under  the  laws  of  a  different  state.  Accordingly,  a  contract 
of  sale  was  entered  into  whereby  the  assets  and  properties 
were  to  be  sold  to  the  new  company  for  the  sum  of  $1,815,000, 
payable  to  the  extent  of  $1,000,000  in  preferred  and  common 
stock  of  the  new  company,  as  follows: 

5,000  Shares  6%  Cumulative  Preferred  Stock $500,000 

6,000  Shares  Common  Stock  500,000 

And  the  balance  by  the  assumption  by  the  new  company  of 
the  existing  liabilities  of  the  old  company.  The  necessary 
resolutions  of  the  directors  and  stockholders  of  both  com- 


kJ 


'*! 


84  PROBLEMS     IN    ACCOUNTING 

panics  were  duly  passed,  and  the  transaction  was  consum- 
mated. As  a  preliminary  step,  however,  the  real  estate,  build- 
ings, plant  and  equipment  were  valued  by  a  firm  of  local 
appraisers,  and  the  following  valuations  were  made: 

Real  Estate $250,000 

Buildings  160,000 

Plant  and  Equipment 300,000 

Draw  up  the  necessary  journal  entries  (a)  for  closing  the 
books  of  the  old  company;  and  (b)  for  opening  the  books  of 
the  new  company.  And  prepare  a  trial  balance  of  both  com- 
panies after  your  journal  entries  have  had  their  effect. 

Problem  149 

A  corporation  is  organized  under  the  laws  of  the  state 
of  New  Jersey,  with  a  capital  of  $1,000,000  in  100,000  shares 
at  $10.00  each.  At  a  meeting  of  the  incorporators  it  was 
resolved  to  purchase  a  patent  right  from  Ole  Oleson  for  the 
entire  capital  of  the  company,  less  100  shares  held  by  the 
incorporators  and  paid  for  by  them  at  par.  The  former  owner 
of  the  patent  agreed  to  sell  to  the  company  50,000  shares  of 
the  capital  stock  for  the  sum  of  $100,000,  or  $2.00  per  share, 
and  John  Johnson  was  appointed  trustee  of  the  company  to 
hold  the  stock  in  his  name  as  trustee,  and  was  authorized 
to  sell  the  stock  at  $7.50  per  share.  This  he  succeeded  in 
doing. 

(a)  Give  the  journal  entries  for  the  transaction. 

(b)  How  would  the  profit  on  this  transaction  effect  div- 
idends to  stockholders? 

Problem  150 

What  are  the  different  reasons  which  a  board  of  directors 
may  have  in  mind  for  reacquiring  the  stock  of  their  own 
company?  Stock  once  issued  and  reacquired  by  a  company 
may  be  kept  or  it  may  be  sold;  if  kept,  different  accounting 
treatment  is  perhaps  required  from  that  necessary  if  it  is  to 
be  sold.  Discuss.  What  is  the  precise  status  of  treasury 
stock?    Assuming  simple  cases,  give  entries. 


PROBLEMS    IN    ACCOUNTING 


85 


Problem  151 


(a)  Give  several  cases,  using  figures,  of  the  acquisition 
of  a  company's  own  stock  and  bonds  above  and  below  book 
value,  and  journalize. 

(b)  What  is  the  real  nature  of  the  stock  discount  and 
stock  premium  accounts?  How  should  they  be  shown  in  the 
balance  sheet? 

(c)  Describe  the  different  methods  of  dealing  with 
unissued  stock,  commenting  upon  the  soundness  of  each. 

(d)  How  would  you  show  unpaid  subscriptions  on  the 
balance  sheet? 

Problem  152 

Bull  Durham,  having  three  claims  in  a  gold  mining  inter- 
est, induces  some  Detroit  men  to  form  the  Digumdeep  Ex- 
tractive Corporation  to  buy  them  from  him.  They  organize 
under  the  laws  of  a  state  which  allows  the  holding  of  treasury 
stock  with  a  capital  of  two  million  shares  of  one  dollar  each, 
all  of  which  is  voted  by  the  stockholders  to  Durham  to  pay 
for  the  transfer  to  the  company  of  the  three  claims.  Durham 
then  donates  to  the  company  one  million  shares  to  be  sold 
for  development  purposes,  at  prices  to  be  fixed  by  the  board 
of  directors.  There  are  sold  from  time  to  time  100,000  shares 
at  12J^  cents,  80,000  at  15  cents,  and  75,000  at  20  cents. 
Twenty  thousand  shares  are  given  as  commissions  to  Levin- 
sky,  an  influential  man,  when  the  price  is  15  cents.  Out  of 
the  cash  received  there  is  expended  for  buildings  $3,000,  for 
sinking  the  shaft  $15,000,  for  machinery  $5,300,  for  officers' 
salaries  $8,000,  for  traveling  expenses  $1,200,  for  office  expense, 
etc.,  $1,400.  The  mine  is  still  in  process  of  development,  since 
the  ore  body  has  not  yet  been  reached. 

Prepare  the  journal  entries  to  put  the  above  transactions 
on  the  books,  making  cash  entries  in  journal  form  for  con- 
venience, and  construct  a  balance  sheet  at  this  point. 


fl 


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86  PROBLEMS    IN    ACCOUNTING 

Problem  153 

The  periodic  profit  figure,  or  net  profit  from  operations, 
should  represent  only  the  amount  by  which  actually  realized 
sales  exceeds  selling  and  administrative  expenses  and  the 
actual  cost  of  the  goods  sold  (the  latter  determined  on  as 
accurate  a  basis  as  possible).  Comment  on  this  statement, 
and  give  the  counter  implications  which  it  contains. 

Problem  154  ' 

The  Dudek  Darem  Company  began  business  on  January 
1,  1919,  manufacturing  a  certain  commodity,  all  of  one  stand- 
ard pattern.  The  bookkeeper,  who  understood  the  principles 
of  double  entry  bookkeeping,  but  was  not  a  trained  account- 
ant, prepared  the  following  statements  at  the  close  of  the 
year; 

Expenses 
Raw  material  purchases $8,000 

Less  Mat'l  Inv.  (at  cost,  including  freight) .  1,000 

Materials  used  $  7,000 

Wages  and  Salaries  12,000 

Freight  , 1,200 

Insurance — Factory 600 

Taxes — Factory   300 

Advertising  1,000 

Stationery  and  Printing  500 

Rent  of  Office  600 

Interest  Paid 200 

General  Expense  3,000 

Repairs  to  Factory  and  Machinery 300 

Heat,  Light,  and  Power — Factory 2,300 

Miscellaneous  Factory  Expense 1,000 

Total  Expenses  for  the  year $30,000 


PROBLEMS     IN     ACCOUNTING  87 

Statement  of  Cost  of  Manufacture  and  Sale 

Total  Expense,  as  above $30,000 

Total  Articles  Produced  3,000 

Goods  in  Process None 

Cost  Per  Article  $       10 

Cost  of  3,000  Articles  Manufactured  at  $10 $30,000 

Inventory  1,000  Articles  Manufactured  at  $10 10,000 

i'  

Cost  of  Goods  Sold,  2,000  Articles  at  $10 $20,000 

Statement  of  Profits 

Sales,  net  2,0C0  Articles  at  $15 $30,000 

Deduct :  Cost  of  2,000  Articles  at  $10 20,000 

Net  Profit  $10,000 

These  statements  were  submitted  to  the  president  of  the 
company.  The  president  doubted  the  ability  of  the  book- 
keeper to  prepare  scientific  statements  of  manufacturing  cost 
and  of  profits,  and  called  you  in  to  verify  the  correctness  of 
the  results  shown  by  the  bookkeeper's  statements.  He  re- 
quests you  to  make  a  report  showing : 

Sales. 

Cost  of  Goods  Sold. 

Gross  Profit  on  Sales. 

Selling  Expense. 

Net  Profit  on  Sales. 

General  Expense  and  Interest  Charges. 

Net  Profit. 
In  the  course  of  your  investigation  you  find  the  follow- 
ing: 

Wages  and  Salaries  Account,  Analysis: 

Productive  Labor $  3,000 

Non-productive  Labor   1,000 

Salesmen's  Salaries 4,000 

Officers'  Salaries  4,000 

Total  $12,000 


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11 


88  PROBLEMS    IN    ACCOUNTING 

Wages  Accrued,  not  included  in  the  above : 

Productive  Labor $     600 

Non-productive   Labor  100 

Total  $  600 

Freight  Account,  Analysis : 

Freight  In $  800 

Freight  Out   400 

Total $  1,200 

Insurance  Account : 

Yz  Unexpired. 
Stationery  and  Printing: 

Of  the  $500  paid  for  this  item,  $100  is  unused. 
Interest  Paid 

Forty  dollars  of  this  amount  is  discount  on  notes  dis- 
counted at  the  bank,  and  is  applicable  to  1920. 

The  officers  consent  to  charging  depreciation  on  the  fac- 
tory building,  $20,000  at  5%;  and  on  machinery,  $5,000  at 
10%.  They  also  consent  to  provision  for  bad  debts  at  1% 
of  sales. 

Prepare  desired  report. 

Problem  155 

(a)  Distinguish  between  "earned  surplus,"  "paid-in  sur- 
plus," "capital  surplus,"  "restricted  surplus." 

(b)  Distinguish  between  an  "income"  dividend  and  a 
"liquidating"  dividend. 

Problem  156 

"The  juggling  of  depreciation  charges  or  other  improper 
accounting  policies  cannot  be  justified  even  if  its  purpose  is 
to  iron  out  the  fluctuations  in  net  revenue  so  that  a  stable  divi- 
dend rate  may  be  established." 

Show  that  dividend  appropriations  may  be  stabilized  by 
the  use  of  the  Undivided  Profits  account  as  a  net  revenue 
reservoir. 


r 


PROBLEMS    IN    ACCOUNTING 


89 


Problem  157 

A  corporation  issues  $300,000  of  stock  in  exchange  for 
a  manufacturing  plant  and  supplies,  with  the  understanding 
that  one-half  of  the  stock  is  to  be  donated  back  to  the  cor- 
poration. After  the  consummation  of  this  agreement  $100,000 
of  the  stock  is  sold  at  80  for  cash.  Next,  $50,000  of  the  stock 
issued  to  the  original  owners  of  the  plant  is  repurchased  at 
70  and  held  for  future  sale.  Show  the  balance  sheet  after 
these  transactions. 

Problem  158 

The  New  York  Steamship  Company  issued  income  deb- 
entures for  $500,000,  the  deed  of  trust  providing .  that  an 
amount  equal  to  5%  of  the  total  issue  be  set  aside  out  of 
the  earnings  of  the  company  each  year  for  the  retirement  of 
the  bonds.  , 

December  31,  1900,  the  assets  of  the  company  amounted 
to  $1,200,000,  the  capital  stock  of  $500,000,  other  liabilities 
$100,000,  profits  for  the  year  $70,000. 

The  company  received  $30,000  from  the  government  for 
transportation  of  troops  during  time  of  war,  which  amount 
did  not  appear  on  the  books  as  an  asset,  the  cost  of  transport- 
ing the  troops  having  been  charged  to  profit  and  loss  account 
in  prior  years. 

Explain  by  journal  entries  (a)  how  the  redemption  fund 
for  the  retirement  of  the  income  debentures  should  be  treated, 
(b)  how  the  income  of  $30,000  for  transportation  should  be 
treated. 

Problem  159 

The  Barnes  brothers  own  and  operate  a  small  canning 
factory.  Attracted  by  the  high  prices  of  war  munitions  they 
decide  to  build  an  addition  to  the  factory  building,  remodel 
the  machinery  and  buy  some  new  equipment  in  order  to  enter 
this  field.  These  changes  will  require  about  $25,000  of  addi- 
tional capital.     It  is  decided  to  reorganize  as  a  corporation 


ii 


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90 


PROBLEMS    IN    ACCOUNTING 


in  order  that  the  business  may  be  more  conveniently  expanded. 
The  balance  sheet  of  the  partnership,  in  summary  form, 
appears  as  follows: 

Assets  Liabilities 

Plant  and  Equipment. $45,000     H.  A.  Barnes $25,000 

Materials  and  Supplies  28,000     J.  W.  Barnes 35,000 

Cash 2,500     Accounts  Payable 18,200 

Other  Current  Assets.   12,600     Notes  Payable 9,000 

Accrued  Items 900 


$88,100  $88,100 

The  partnership  is  reorganized  as  a  corporation,  the 
Barnes  Manufacturing  Co.  Capital  Stock  is  authorized  to  the 
amount  of  $125,000.  The  entire  amount  is  subscribed  at  par. 
The  partners  receive  $76,000  in  stock;  their  equities  in  the 
partnership  being  considered  as  full  payment.  The  holders 
of  the  partners'  notes  to  the  full  amount  of  $9,000  are  induced 
to  take  stock  in  the  new  enterprise  for  the  same  amount.  A 
steel  company  which  has  an  open  account  against  the  part- 
nership for  $5,000  for  materials  purchased  takes  stock  to  that 
amount  in  full  settlement  of  the  account.  The  other  subscrip- 
tions are  all  paid  in  cash.  The  liabilities  of  the  partnership 
are  assumed  by  the  corporation,  and  the  assets  taken  over. 

Prepare : 

(a)  Closing  entries  for  the  partnership. 

(b)  Opening  entries  for  the  corporation. 

(c)  The  balance  sheet  of  the  corporation  as  it  appears 
after  the  conclusion  of  the  foregoing  transactions. 

Problem  160 

The  X  Mining  Co.  is  incorporated  with  an  authorized 
capital  stock  of  $200,000,  par  $10  per  share.  Subscriptions 
for  stock  are  taken  to  the  amount  of  15,500  shares  at  par. 
These  subscriptions  are  paid  as  follows:  mineral  lands,  $100,- 
000;  water  rights,  $54,000;  the  balance  in  cash.  A,  a  stock- 
holder who  furnished  the  water  rights  as  payment  for  a  sub- 


PROBLEMS    IN    ACCOUNTING 


91 


scription  of  6,000  shares,  donates  4,000  shares  to  the  corpora- 
tion for  the  purpose  of  raising  working  capital.  This  stock 
is  reissued  at  an  average  price  of  $8  per  share. 

(a)  Journalize  the  above  transactions,  using  only  the 
general  ledger  accounts,  and  prepare  a  balance  sheet,  assum- 
ing the  land  and  water  rights  have  bona  fide  values  as  given 
above.  In  this  event  what  premium  does  A  really  pay  for  his 
stock?    How  much  does  he  actually  lose? 

(b)  Assuming  the  water  rights  are  worth  but  $16,000, 
how  should  the  above  entries  and  balance  sheet  be  changed? 
Which  of  the  two  statements  which  you  have  prepared  do 
you  consider  to  be  the  most  reliable  expression  of  the  Com- 
pany's true  position?    Give  reasons. 

Problem  161 

A  corporation  is  organized  to  exploit  a  mining  property. 
Authorized  capital  is  5,000  shares,  par  $100.  There  are  three 
original  incorporators  each  of  whom  subscribes  for  10  shares. 
These  subscriptions  are  paid  in  cash.  One  of  the  incorporators 
is  the  owner  of  mineral  lands  which  he  now  agrees  to  turn 
over  to  the  corporation  in  exchange  for  2,500  shares  of  stock. 
This  transaction  is  consummated.  Later  this  individual  do- 
nates 750  shares  of  stock  to  the  company  to  be  sold  to  raise 
working  capital.    This  stock  is  sold  at  a  discount  of  30%. 

Give  journal  entries  covering  the  foregoing  transactions 
and  prepare  a  balance  sheet. 

Problem  162 

How  may  those  in  control  of  a  corporation  manipulate 
the  income  account  to  the  detriment  of  certain  income  equi- 
ties? What  would  be  the  accounting  effect  of  the  entries 
required  to  carry  out  their  purpose? 

Problem  163 

How  would  the  problem  of  liquidating  a  partnership 
differ  from  that  of  liquidating  a  corporation? 


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n  PROBLEMS    IN    ACCOUNTING 

Problem  164 

A  company  whose  stock  is  widely  distributed  and  much 
dealt  in,  increases  its  capital  stock  of  $500,000  by  a  stock  div- 
idend of  100%.  Some  years  subsequently  an  original  stock- 
holder brings  suit  for  elimination  from  the  capital  stock  of 
what  he  asserts  is  "water."  How  can  the  dividend  stock  be 
eliminated  from  $1,000,000  of  stock  outstanding? 

Problem  165 

A  company  incorporated  with  a  capital  of  $200,000.00 
fully  paid  up,  has  sold  its  stock  at  a  premium  of  25  per  cent, 
thus  realizing  in  cash  $250,000.00.  The  By-laws,  which  can- 
not be  amended  except  in  a  stockholders'  meeting  and  after 
proper  notice  of  such  amendment  having  been  mailed  to  each 
stockholder  ten  days  prior  to  the  meeting,  contain  a  provision 
that  the  $50,000.00  so  received  over  and  above  the  capital 
stock  shall  be  placed  to  the  credit  of  a  Special  Reserve  account, 
and  that  this  reserve  shall  not  be  applicable  toward  the  pay- 
ment of  dividends.  At  the  close  of  the  first  fiscal  year,  it 
was  found  that  the  company  has  made  a  net  profit  of  $4,000.00 
after  charging  $6,000.00  for  depreciation  on  buildings  and 
machinery.  The  directors  desire  to  pay  a  cash  dividend  of 
five  per  cent,  and  pass  a  resolution  ordering  that  the  depre- 
ciation referred  to  above  shall  be  charged  against  the  Special 
Reserve  Account,  instead  of  against  Profit  and  Loss,  and  they 
then  proceed  to  declare  a  dividend  of  five  per  cent.  Discuss 
this  transaction  from  an  accountant's  standpoint. 

Problem  166 

The  profit  and  loss  account  of  the  Howell  Manufacturing 
Company,  manufacturers  of  phonographs,  shows  the  following 
debits  for  the  year  ended  June  30,  1920 : 

July  1,  1919,  raw  materials $12,500 

July  1,  1919,  1600  finished  machines 48,000 

Raw  material  purchased   62,500 

Productive  labor   82,500 


PROBLEMS    IN    ACCOUNTING  93 

Coal,  repairs,  paint,  varnish,  superintendence,  indirect 

labor  and  sundry  supplies 23,000 

Agents'  commissions   90,000 

Branch  expenses — rents,  salaries,  etc 40,000 

Salesmen's  salaries  and  expenses 20,000 

Rebates  and  allowances   10,000 

Bad  debts   8,000 

Depreciation  of  plant  and  machinery 5,500 

June  30,  1919  the  directors  establish  a  unit  sales  price 
of  $90.  The  raw  materials  inventories  June  30,  1920,  at  cost, 
amounted  to  $4,000.  The  sales  billed  during  the  year  aggre- 
gated $540,000.  At  June  30,  1920,  finished  phonographs  in 
stock  numbered  800. 

Prepare  a  profit  and  loss  statement  showing  the  itemized 
manufacturing  cost  per  machine,  and  gross  and  net  profit  per 
machine. 

Problem  167 

A  manufacturer  having  turned  his  business  into  a  cor- 
poration and  yet  owning  all  the  stock  himself — only  a  few 
shares  standing  on  the  company's  books  as  belonging  to  his 
friends — finds  after  a  time  that  the  business  needs  more  cap- 
ital. Thereupon  he  agrees  to  sell  a  portion  of  the  stock  to 
outside  parties  for  cash,  stipulating  that  the  money  so  obtained 
shall  all  be  put  into  the  business — that  is,  shall  be  at  once 
expended  in  purchasing  new  machinery.  The  sale  is  made 
and  machinery  purchased. 

How  is  this  transaction  properly  to  be  brought  into  the 
company's  accounts? 

Problem  168 

The  Calamity  Corporation  (incorporated  under  the  laws 
of  New  Jersey)  has  a  capital  stock  of  $40,000,  which  is  held 
as  follows:  X,  $21,000;  Y,  $2,000;  C,  $8,500,  and  B,  $8,500. 
On  December  31,  1921,  there  is  an  undivided  profits  figure 
of  $34,577.    X  disposes  of  his  entire  interest  in  the  concern 


1! 


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PROBLEMS     IN    ACCOUNTING 


for  $35,000,  which  is  paid  him  by  the  company  out  of  the 
company  funds.  The  company  then  agrees  with  Y  to  pay 
him  for  his  holdings  at  their  book  value,  as  determined  imme- 
diately following  X's  retirement. 

Draft  entries  in  journal  form  covering  the  above  transac- 
tions, showing  amount  paid  to  B,  and  the  value  of  the  stock 
remaining  in  the  names  of  C  and  B. 

Problem  169 

If  a  company  has  $100,000  preferred  and  $100,000  com- 
mon stock,  the  preferred  to  have  6%  dividends,  and  the  com- 
pany makes  net  profits  the  first  year  of  $5,000,  the  second  year 
of  $12,000,  and  the  third  year  of  $16,000,  what  would  be  the 
dividends  to  each  class  of  stock  if  the  preferred  was  non- 
cumulative,  cumulative,  or  cumulative  with  further  equal 
dividends  after  the  common  had  received  6%?  (Directors 
are  supposed  to  declare  each  year  all  the  dividends  possible.) 

Problem  170 

A  corporation  has  a  capital  stock  of  $100,000.  It  has 
net  assets  at  inventory  value  amounting  to  $160,000.  With 
a  view  to  reducing  the  number  of  its  enterprises,  it  sells  two 
of  its  stores  for  $85,000  at  inventory  value.  This  $85,000  is 
distributed  among  its  stockholders.  What  entries  should  be 
made  upon  the  books,  and  what  procedure  would  you  rec- 
ommend to  safeguard  all  interests  in  making  such  a  distri- 
bution? 

Problem  171 

A  company  with  an  authorized  capital  stock  of  $1,000,000, 
$100  par  value,  issues  $800,000  of  shares  in  payment  of  various 
properties.  In  order  to  secure  working  capital  the  stock- 
holders return  to  the  company  ^ths  of  their  holdings  to  be 
sold  at  $50,  and  on  the  same  day  1,000  shares  are  sold  and 
paid  for.  Draft  entries  to  show  how  you  would  treat  this 
matter. 


PROBLEMS     IN    ACCOUNTING 


95 


Problem  172 

A  corporation  is  organized  with  a  capital  of  $1,000,000 
in  100,000  shares  at  $10.00  each,  50,000  shares  of  which  are 
common,  and  50,000  preferred  stock. 

20,000  shares  of  the  preferred  stock  have  been  sold  at 
par  on  which  an  assessment  of  $5.00  per  share  has  been  paid. 

Subsequently,  it  was  decided  by  the  shareholders  to 
donate  one  share  of  the  common  stock  of  the  company  to 
the  purchaser  of  each  share  of  the  preferred  stock,  the  orig- 
inal subscribers  to  the  20,000  shares,  on  which  an  installment 
of  $5.00  per  share  was  paid,  to  receive  the  benefit  of  said 
offer  upon  the  payment  of  the  balance  of  their  subscription. 

The  effect  of  this  offer  was  that  all  the  preferred  stock 
was  sold,  and  the  balance  of  the  installment  due  was  also 
paid. 

Give  entries  for  all  the  above,  placing  the  transactions 
at  intervals  of  one  month. 

Problem  173 

What  do  you  understand  by  watered  stock,  and  how  may 
a  corporation  eliminate  such  water? 

Problem  174 

The  Pinconning  Mining  Company  has  four  stockholders, 
each  holding  one-quarter  of  the  stock,  on  which  payments 
have  been  made  as  follows: 


Stockholder 

Shares 

Par 

Am't  Paid 

A 

15 

1,500 

1,500 

B 

15 

1,500 

150 

C 

15 

1,500 

150 

D 

15 

1,500 

0 

A,  the  president  of  the  company,  makes  an  agreement  to 
buy  the  stock  held  by  B,  C,  and  D,  paying  them  $750  each, 
or  $50  per  share.  He  uses  the  company's  checks  to  pay  B, 
C,  and  D,  and  the  stock  is  transferred  to  A's  name  on  the  cor- 
poration's books. 

What  entries  should  be  made  by  the  company? 


:i 


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96 


PROBLEMS    IN    ACCOUNTING 


Problem  175 

John  Kokomo  contracts  for  $5,000  of  capital  stock  in  the 
Stone  Manufacturing  Company,  which  is  to  be  paid  for  in 
five  equal  installments.  He  fails  to  pay  the  last  installment 
and  forfeits  the  stock  to  the  corporation.  The  latter  sells  it 
for  $3,800.    The  cost  of  selling  was  $50.    Journalize. 

Problem  176 

The  executive  committee  of  a  corporation  making  a  cer- 
tain patented  article  find  that  their  product  has  cost  the  fol- 
lowing per  cent  of  the  sales  price: 

Raw  Material 30 

Wages  20 

Rent    5 

Fuel   10 

General  Expenses 15 

80 

What  should  he  add  to  his  selling  price  to  obtain  the 
same  profit  if  the  following  advances  took  place? 

Coal 50  per  cent  advance 

Materials   6    "      " 

Wages 2,y2    "      " 

Problem  177 

(a)  State  whether  depreciation  is  an  element  of  the  cost 
of  manufactured  products.  If  so,  why?  If  not,  how  would 
you  provide  for  replacing  productive  properties? 

(b)  What  is  signified  by  "cost  less  accrued  deprecia- 
tion"? By  "cost  of  replacement  less  accrued  depreciation"? 
By  "cost  of  reproduction  less  accrued  depreciation"? 

(c)  What  do  you  understand  by  "absolescence"  and 
"inadequacy"?  Can  provision  be  made  in  the  operating  ac- 
counts for  absolescence  and  inadequacy? 

(d)  What  other  costs  of  carrying  on  a  business  are  of 
the  extra-periodic  character,  and  yet  must  be  met  out  of  the 


PROBLEMS    IN    ACCOUNTING 


97 


years'  product  of  operations  before  it  can  be  said  that  a  com- 
pany has  earned  "income"? 

Problem  178 

(a)  Discuss :  "The  amount  to  be  pro  rated  against  sales 
in  respect  of  a  fixed  asset  is  the  sum  total  of  the  cost  of  the 
property  plus  repairs  divided  by  the  number  of  years'  serv- 
ice life.  In  the  meantime,  if  any  expenditure  is  made  which 
changes  that  sum  or  that  number  of  years  is  more  properly 
a  ^capital'  charge." 

(b)  Discuss:  "It  is  foolish  to  attempt  to  adjust  book 
values  of  fixed  assets  to  changing  costs  of  reproduction  or 
replacement.  In  this  dynamic  order,  only  the  executed  event 
proves  the  character  of  the  change.  Although  the  accountant 
cannot  rationally  adjust  specific  values  in  accord  with  the 
dictates  of  experience  of  his  particular  business,  he  should 
make  adequate  provision  for  the  uninsurable  probabilities 
based  on  that  experience." 

Problem  179 

Vergus  Dogberry  manufactures  a  specialty  covered  by  a 
patent.  He  finds  that  his  orders  exceed  his  ability  to  fill 
owing  to  a  want  of  capital.  He  desires  to  interest  capital 
in  the  business,  but  feels  that  he  cannot  do  so  unless  he  can 
make  some  inducement  to  them  and  limit  their  liability. 

He  proposes  to  form  a  corporation  with  a  capital  of 
$200,000,  all  common  stock,  and  as  the  business  has  already 
paid  him  $10,000  per  year  on  his  limited  capital,  he  thinks 
he  is  entitled  to  the  whole  capital  stock.  This  would  not, 
however,  produce  the  additional  capital  required,  and  for  that 
reason  he  agrees  to  accept  $120,000  in  stock  of  the  new  com- 
pany in  full  for  his  patents  and  the  following  assets: 

Machinery $  6,500.00 

Real  Estate   10,000.00 

Suggest  a  plan  for  arriving  at  the  end  desired,  and  for- 
mulate journal  entries  whereby  the  stock  of  the  new  company 
can  be  sold  at  such  prices  as  may  interest  investors. 


4 


I 


98  PROBLEMS    IN    ACCOUNTING 

Assume  that  the  investors  demand  12J4%  on  the  actual 
investment,  and  that  the  net  profits  are  expected  to  be  only 
$20,000  per  annum. 

Problem  180 

Discuss  the  theory  and  purpose  of  averaging  accounts 
receivable.    Give  an  illustration  of  a  simple  account  averaged. 

Problem  181 

The  American  Tube  Company  is  incorporated  to  pur- 
chase by  issue  of  preferred  and  common  stock,  three  con- 
cerns doing  the  same  business.  The  preferred  stock  carries 
6%  dividends.  An  examination  of  the  books  was  made  and 
the  properties  were  valued  by  actual  appraisement  by  a  dis- 
interested expert.  The  following  is  a  summary  of  the  con- 
dition of  each  of  the  three  plants: 

A.  B.  Co.  CD.  Co.  E.  F.  Co 
Cash    Acct.    Rec,    and    Bills    Rec. 

(good) 25,000         15,000         50,000 

Stock  on  hand   25,000         20,000         10,000 

Plant  and  machinery  50,000        25,000         90,000 

Acc'ts  and  Bills  Payable 10,000         20,000         15,000 

Mortgages  Payable 20,000  35,000 

Average  annual  net  operating  prof- 
its, 5  years 10,000         15,000  8,000 

You  are  consulted  in  regard  to  the  capitalization  of  the 
new  company,  and  how  the  stock  should  be  apportioned  to 
the  three  concerns.  Make  an  equitable  distribution,  taking 
into  consideration  the  values  of  the  net  assets  and  the  good- 
will. 

Problem  182 

A  factory  cost  $100,000.00.  Depreciation  amounting  to 
$40,000.00  has  been  charged.  An  engineer's  appraisal  shows 
actual  value  of  $80,000.00.  Should  there  be  any  adjustment 
of  the  plant  account,  and  how  would  the  matter  of  deprecia- 
tion or  appreciation  affect  the  current  year's  profit  and  loss 
account? 


PROBLEMS    IN    ACCOUNTING 


99 


n 


Problem  183 

A  company  insures  the  life  of  its  manager  for  its  own 
benefit  in  the  sum  of  $50,000,  the  annual  premium  being  $1,250. 
Explain  the  method  you  would  adopt  of  treating  the  dis- 
bursement at  the  annual  accounting  during  the  period  the 
policy  was  in  force. 

Problem  184 

A  gas  company  with  a  capital  of  $5,000,000  and  a  surplus 
of  $1,000,000  had  made  no  provision  for  the  depreciation  of 
its  property  till  the  directors  reviewed  the  valuation  of  the 
property  accounts  and  decided  to  write  off  $2,000,000,  thus 
creating  an  apparent  deficit  of  $1,000,000.  The  net  earnings 
during  the  year  following  the  writing  down  of  the  assets 
amounted  to  $1,250,000  before  any  depreciation  was  charged, 
and  the  directors  proposed  to  pay  out  as  dividends  $1,000,000. 
What  opinion  would  you  express  as  to  this  proposition,  if 
called  on  by  the  board  before  final  action  was  taken? 

Problem  185 

"The  method  that  should  be  adopted  to  ascertain  the  net 
earnings  of  a  street  railway  company,  is  to  deduct  from  the 
gross  earnings, 

(a)  Operating  Expenses,  and  maintenance; 

(b)  Interest  upon  the  bonded  indebtedness; 

(c)  Depreciation;  and 

(d)  Where  the  city  franchise  or  ordinance  operated 
under  is  of  limited  duration,  then  a  sinking  fund 
necessary  to  retire  bonds,  when  the  franchise  ex- 
pires, for  then  the  business  ceases." 

The  above  extract  is  from  an  "Argument  for  the  Estab- 
lishment of  Rules  and  Principles  that  Should  Guide  the  Board 
of  Public  Works  in  Assessing  Street  Railway  Property." 

You,  as  City  Auditor,  are  asked  to  write  an  opinion  on 
the  correctness  of  the  principles  above  set  forth,  especially  (d). 


100 


PROBLEMS    IN    ACCOUNTING 


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Problem  186 

A  public  service  corporation  that  regularly  sets  aside 
from  its  profits  a  sufficient  amount  to  provide  for  deprecia- 
tion and  credits  the  amount  to  Depreciation  Reserve,  removes 
part  of  its  old  plant  and  replaces  it  with  a  larger  and  more 
costly  one.  The  old  plant  is  sold  for  scrap.  How  should  the 
cost  of  the  new  plant  and  the  proceeds  from  the  sale  of  the 
old  plant  and  the  excess  of  cost  of  old  plant  over  scrap  be 
treated  in  the  accounts  of  the  company?     Give  reasons. 

Problem  187 

The  secretary  of  a  manufacturing  corporation  which  has 
no  surplus  has  undertaken  to  close  the  books.  The  balance 
to  the  credit  of  the  profit  and  loss  account  is  just  sufficient 
to  enable  the  directors  to  declare  a  small  dividend,  which 
they  propose  to  do.  At  this  juncture  the  services  of  an 
accountant  are  secured.  He  finds  that  no  provision  for  depre- 
ciation has  been  made,  and  that  all  expenditures  for  repairs 
and  renewals,  amounting  to  more  than  the  proposed  dividend, 
have  been  charged  direct  to  plant  account.  Show  the  nature 
of  any  corrective  entries  which  should  be  made.  What  would 
be  the  effect  on  the  balance  sheet  of  such  entries? 

Problem  188 

The  statement  submitted  by  the  treasurer  of  a  corporation 
shows  receipts  of  money  greatly  in  excess  of  disbursements, 
leaving  a  balance  in  hand  of  more  than  enough  to  pay  to 
stockholders  a  dividend  of  6%.  The  directors  declare  such 
dividend  pursuant  to  the  statement  submitted  without  asking 
for  any  other  further  information.  Was  the  act  of  the  direc- 
ors  a  prudent  one  under  the  circumstances?  Give  reasons  for 
your  answer. 

Problem  189 

A  manufacturing  corporation  handling  a  patent  device 
issued  bonds  aggregating  $375,000,  payable  in  installments  of 
$25,000  annually  for  fifteen  years.     Having  in  mind  possible 


PROBLEMS    IN    ACCOUNTING 


101 


competition  and  obsolescence  of  its  property,  it  was  provided 
that  the  sinking  fund  installments  be  charged  against  earn- 
ings. The  president  of  the  company  had  a  contract  under 
which  he  was  to  receive  a  bonus  of  5%  of  the  net  profits  in 
addition  to  his  salary,  but  it  was  specifically  provided  that 
as  to  him  the  charges  against  earnings  should  not  include 
the  sinking  fund  installments.  In  making  up  the  first  year's 
accounts  the  auditors  decided  that  the  depreciation  reserve, 
as  nearly  as  could  be  determined,  should  be  stated  as  $25,000 
and  this  amount  was  included  among  the  operating  expenses. 
When  their  report  was  submitted  to  the  directors,  the  presi- 
dent referred  to  his  contract  and  stated  that  the  sinking  fund 
provision  and  depreciation  were  synonymous  and  that  he  was 
entitled  to  5%  of  the  earnings  before  any  deduction  was  made 
for  depreciation.  The  matter  is  referred  to  you  as  an  account- 
ant; what  is  your  opinion? 

Problem  190 

A  corporation's  income  sheet  for  1912  showed  a  surplus 
for  the  year  of  $150,000.  In  1913  the  surplus  appearing  on 
the  income  sheet  was  $200,000.  Are  these  figures  consistent 
with  the  following  items  appearing  on  the  liabilities  side  of 
the  balance  sheet  for  the  years  in  question? 

1911  1912  1913 

Reserve  for  Accrued  Depreciation.$120,000  $145,000  $175,000 

Reserve  for  Addition  to  Plant 100,000  150,000  200,000 

Contingent  Reserve   100,000  150,000 

Surplus   750,000  700,000  800,000 

Problem  191 

A  banking  company  with  $200,000  of  capital  stock  out- 
standing shows  at  the  end  of  a  certain  year  profits  for  that 
year  amounting  to  $38,000.  The  directors  write  off  $8,000 
of  Premium  on  Bonds  purchased  during  the  year,  and  $10,000 
of  the  original  cost  of  its  fixtures,  charging  both  these  amounts 
to  the  Undivided  Profit  account.     The  bonds  had  not  fallen 


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PROBLEMS    IN    ACCOUNTING 


in  market  value,  and  5%  had  already  been  charged  to  Expense 
for  Depreciation  on  Fixtures.  How  would  you  describe  the 
result  of  this  action  on  the  part  of  the  directors? 

Problem  192 

What,  in  your  opinion,  would  be  the  proper  accounting 
record  for  a  business  corporation  to  make  of  an  appropriation 
from  its  surplus  profits  for  the  amount  of  a  permanent  invest- 
ment in  property? 

Problem  193 

A  New  York  company  sells  its  capital  stock  at  a  pre- 
mium and  the  directors  pass  a  resolution  to  declare  a  divi- 
dend out  of  the  surplus  thus  paid  in.  Would  you  call  atten- 
tion to  this  action  if  asked  to  make  up  the  accounts,  and  if 
so,  why? 

Problem  194 

A  corporation  manufacturing  explosives  is  compelled  to 
pay  exorbitant  rates  for  a  very  limited  amount  of  insurance, 
and  in  consequence  was  obliged  to  install  an  automatic 
sprinkler  system  at  a  cost  of  $75,000.  This  additional  fire 
protection  enabled  them  to  secure  a  full  line  of  insurance, 
though  in  mutual  companies,  and  at  a  much  lower  rate  than 
was  obtained  prior  to  such  installation.  At  the  end  of  the 
fiscal  year  the  company  received  dividends  from  these  mutual 
insurance  companies  aggregating  $2,000.  To  what  account 
should  the  cost  of  the  sprinkler  system  be  charged  and  to 
what  account  should  this  dividend  be  credited?  State  your 
reasons  fully. 

Problem  195  I 

If  a  company,  duly  organized,  acquires  several  plants 
that  are  found  to  be  in  a  "run  down"  condition,  and  to  require 
extensive  outlay  for  repairs  and  renewals  to  bring  them  to 
the  required  state  of  efficiency,  should  such  outlay  be  charged 
against  Capital  or  against  Revenue? 


PROBLEMS    IN    ACCOUNTING 


103 


Problem  196 

A  Life  Insurance  Co.  has  issued  $100,000  of  stock  all 
fully  paid  up  in  cash.  During  the  first  year  preliminary  ex- 
penses and  expenditures  for  agency  establishment  and  adver- 
tising amount  to  $15,000.  The  liabilities  exceed  the  tangible 
assets  by  $12,000  at  the  end  of  the  year.  Should  the  balance 
sheet  be  corrected  by  reducing  the  capital  stock?  If  not, 
what  item  would  you  place  on  the  asset  side  to  offset  the 
$12,000  excess  of  liabilities? 

Problem  197 

A  corporation  organizes  under  the  laws  of  the  state  of 
New  Jersey  to  conduct  a  manufacturing  business,  with  an 
authorized  capital  stock  of  $1,000,000.00,  divided  equally  be- 
tween preferred  and  common.  Five  incorporators  each  sub- 
scribe for  100  shares  of  the  common  stock  of  a  face  value  of 
$100.00  per  share.  John  Jones  purchases  from  three  manu- 
facturers their  fully  equipped  plants  for  $950,000.00  in  cash, 
and  turns  over  the  said  three  plants  to  the  newly  incorporated 
company  for  the  $950,000.00  of  preferred  and  common  stock 
and  $400,000.00  of  first  mortgage  5  per  cent,  bonds,  out  of  a 
total  issue  of  said  bonds  in  the  sum  of  $500,000.00,  leaving 
$100,000.00  of  said  bonds  in  the  company's  treasury. 

Prepare  opening  entries  with  necessary  explanations  of 
the  transactions  and  a  statement  of  the  company's  condition 
after  having  acquired  the  three  plants. 

Problem  198 

The  trial  balance  of  a  corporation  shows  Dec.  31,  1912, 
a  credit  to  capital  stock  account  of  $74,176.  The  authorized 
capital  of  the  company  is  $150,000.  There  is  $50,000  stock 
in  the  treasury  of  the  corporation.  These  figures  in  the  trial 
balance  were  occasioned  by  the  fact  that  the  bookkeeper,  not 
understanding  corporation  bookkeeping,  had  charged  the  cap- 
ital stock  account  with  losses  as  follows:  1908,  $13,884.50; 
1909,  $9,897.50;  1910,  $32,507.50;  and  credited  the  same  ac- 


il! 


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104 


PROBLEMS    IN    ACCOUNTING 


count  with  gains  as  follows:  1911,  $4,319.15;  1912,  $26,146.35. 
(a)  Make  the  necessary  entries  to  adjust  the  books  so  as  to 
show  the  true  condition  December  31,  1912.  (b)  Give  a  clear 
and  concise  explanation  of  the  nature  of  the  bookkeeper's 
error  and  of  the  changes  which  are  necessary. 

Problem  199 

At  the  beginning  of  the  year,  January  1,  the  capital  stock 
of  a  corporation  was  $100,000,  and  it  is  known  to  represent 
good  assets;  the  surplus  was  $24,000,  the  outside  liabilities 
were  $17,000.  The  net  earnings  since  January  1  have  been 
$16,000,  and  nothing  has  been  paid  in  dividends.  What  is 
the  present  excess  of  assets  over  outside  liabilities? 

Problem  200 

It  is  proposed  to  organize  for  conducting  a  small  manu- 
facturing business  a  corporation  based  on  certain  rights  and 
franchises  owned  by  one  of  the  proposed  stockholders.  The 
amount  of  the  capital  stock  is  to  be  $100,000.  The  owner 
of  the  rights  and  franchises  agrees  to  transfer  them  to  the 
corporation  in  consideration  of  $50,000  of  the  capital  stock, 
though  he  believes  them  to  be  worth  much  more  than  that 
amount.  The  remainder  of  the  stock  is  to  be  sold  to  provide 
working  capital.  Certain  capitalists  are  to  be  approached  for 
cash  subscriptions  to  the  capital  stock,  but  it  is  uncertain 
what  opinion  they  hold  concerning  the  enterprise,  and  it  is 
desired  to  have  the  stock  in  the  treasury  in  such  form  that  it 
can  be  sold  below  par  if  necessary.  What  method  would  you 
suggest  for  accomplishing  the  end  in  view?  Formulate  the 
journal  entries  for  opening  the  books  of  the  corporation  in 
accordance  with  your  suggestion. 

Problem  201 

The  third  installment  of  the  subscriptions  for  the  stock  of 
The  Elite  Amusement  Company  was  due  on  January  1,  1915. 
Because  of  the  large  profits,  however,  it  was  decided  not  to 
call  this  third  installment,  but  instead  a  dividend  was  declared 


i 


PROBLEMS    IN    ACCOUNTING 


105 


just  equal  to  the  amount  subscribers  still  owed  for  this  in- 
stallment, and  "fully  paid"  stock  certificates  were  then  issued 
to  the  subscribers.  What  entries  are  necessary  to  properly  record 
these  facts? 

Problem  202 

The  Prosperous  Company  is  organized  under  the  laws  of 
the  State  of  New  York  to  conduct  a  manufacturing  business. 
The  authorized  capital  is  $500,000,  divided  into  $250,000  com- 
mon and  $250,000  preferred  stock,  par  values  of  shares  $100. 
Five  incorporators  subscribe  each  for  one  share  of  common 
stock  at  face  value.  John  Peters,  one  of  the  incorporators, 
purchases  from  three  manufacturing  companies  their  com- 
plete plants  for  $499,500  and  transfers  said  plants  to  the  Pros- 
perous Company  for  the  remaining  $499,500  of  common  and 
preferred  stock  and  $100,000  of  first  mortgage  5  per  cent, 
bonds  out  of  a  total  issue  of  bonds  amounting  to  $150,000, 
leaving  $50,000  of  bonds  in  the  treasury.  The  incorporators 
then  pay  in  cash  for  their  respective  subscriptions. 

The  individual  assets  acquired  are  as  follows:  Land  and 
buildings,  $75,000 ;  plant  and  machinery,  $200,000 ;  tools,  equip- 
ment and  fixtures,  $50,000;  inventories,  $100,000;  accounts 
receivable  good  $28,000,  doubtful  $5,000 ;  cash,  $12,000. 

Prepare  (a)  opening  entries  for  the  books  of  the  Pros- 
perous Company;  (b)  initial  balance  sheet  showing  the  com- 
pany's financial  condition. 

Problem  203 

Comparative  Balance  Sheet. 

Assets 

1913  1912 

Plants,  patents,  goodwill  $71,060,813  $70,685,722 

Investments   1,768,045  1,635,958 

Treasury  stock   2,058,700  2,227,117 

Inventory    12,614,926  16,226,639 

Accounts  receivable 5,477,195  6,370.890 


\       I 


if 


i 


106         PROBLEMS     IN    ACCOUNTING 

Bills  receivable   686,274  606,944 

Cash 723,053  803,225 

Prepaid  insurance,  taxes   222,950  229,619 

Total  Assets $94,511,956  $98,786,114 

Liabilities 

Common  stock   $60,000,000  $60,000,000 

Preferred  stock 30,000,000  30,000,000 

Bills  payable   2,799,736  6,479,411 

Accounts  payable 489,031  653,185 

Accrued  liabilities 217,206  547,283 

Contingent  reserve 300,000  300,000 

Surplus    705,983  806,235 

Total  Liabilities  $94,511,956        $98,786,114 

In  the  capital  asset  item,  real  estate,  buildings,  machinery, 
etc.,  are  listed  at  $12,679,151;  patents  at  $583,650  and  good- 
will at  $57,798,000. 

The  income  account  for  the  year  1913,  shows  the  follow- 
ing facts : 

Net  Sales $39,509,346 

Expenses 36,451,233 

Balance  $  3,058,113 

Misc.  Income 491,316 

Total  Income $  3,549,429 

Treasury  Stock  reduced  from  Cost  to  par  value.. $      168,417 

Depreciation 541,359 

Interest  on  Bills  Payable 239,906 

Net  Profit $  2,599,747 

Preferred  Dividends   $  2,100,000 

Common  Dividends  600,000 

Deficit  for  year $     100,253 


PROBLEMS     IN    ACCOUNTING 


107 


"Profits  for  the  B.  F.  Goodrich  (rubber)  Company  and 
subsidiary  companies  in  the  year  ended  Dec.  31,  1913,  appli- 
cable to  dividends  was  $2,599,747."— The  Chicago  Record- 
Herald,  Feb.  24,  1914. 

(a)  Comment  on  the  above  statement  assuming  that 
the  figures  in  the  Company's  financial  statements  are  correct. 

(b)  What  would  you  say  as  to  the  value  of  the  good- 
will item  appearing  in  the  balance  sheet?  ' 

Problem  204 

Before  making  the  charges  referred  to  below,  the  profit 
and  loss  account  of  a  corporation  for  the  year  shows  a  credit 
balance  of  $60,000.  The  accounts  receivable  are  $40,700,  and 
the  plant  and  machinery  account  is  $55,000.  The  6  per  cent 
preferred  stock  is  $50,000  and  the  common  $150,000.  It  is 
decided  (1)  to  provide,  out  of  the  above  named  profit  and 
loss  balance  7]^^  per  cent  depreciation  on  plant  and  machinery ; 
(2)  to  write  off  as  uncollectible  $1,500  of  the  accounts  receiv- 
able and  to  make  a  reserve  of  2  per  cent  on  the  remainder 
of  the  accounts  receivable  to  provide  for  possible  losses  there- 
on; (3)  to  provide  for  the  preferred  stock  dividend  for  the 
year;  (4)  to  provide  for  a  bonus  of  $7,500  to  the  employees; 
(5)  to  provide  for  a  dividend  on  the  common  stock  of  15  per 
cent  for  the  year  and  (6)  to  carry  the  balance  then  remaining 
on  the  profit  and  loss  account  to  undivided  profit  account. 

Draft  the  journal  entries  to  give  effect  to  the  above. 

Problem  205 

It  has  been  proposed  that  if  goodwill  is  to  be  written  oflF 
at  all  the  charge  should  be  made  to  the  capital  account.  Give 
your  opinion  of  this. 

Problem  206 

What  is  your  opinion  of  the  correct  accounting  treatment 
of  stocks  or  bonds  given  as  a  "bonus"  with  some  other  se- 
curity? Assume  a  simple  case,  and  state  the  entries  you 
would  recommend. 


i 


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108 


probhems   in  accounting 


1 


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:  I 


Problem  207 

Name  some  of  the  problems  which  the  nominal  capital- 
ization on  the  basis  of  "par"  stock  gives  the  accountant. 

Problem  208 

Explain,  with  illustrative  entries,  what  you  would  do  with 
the  "Sinking  Fund  Reserve"  after  satisfaction  of  the  bond 
contract- 

SECTION  V.    Depreciation. 

Depreciation  may  be  defined  as  the  expiration  of  capital 
outlay  which  takes  place  through  "wear  and  tear"  and  nat- 
ural deterioration.  A  durable  good  may,  of  course,  become 
valueless  through  obsolescence  and  inadequacy,  but  such 
changes,  it  seems,  do  not  operate  to  depreciate  an  asset  in 
the  usual  sense  of  the  verb.  Obsolescence  and  inadequacy 
no  scheme  of  estimate  could  embrace  to  any  constructive  end. 
The  problem  of  depreciation  accounting,  as  it  is  ordinarily 
met,  is  the  fairly  equitable  spreading  of  the  capital  costs  of 
a  production  unit  (original  cost  plus  maintenance)  over  the 
accounting  periods  which  receive  the  benefit  of  its  service. 
A  solution  necessarily  involves  some  estimate  of  the  number 
of  years*  life  which,  with  reasonable  maintenance  expendi- 
ture, a  property  may  be  expected  to  last.  There  may  be  an 
attempt  to  spread  repair  cost  uniformly  over  the  periods  of 
operation,  or  repairs  may  be  charged  in  the  period  when  made. 
Whatever  specific  solution  is  supported,  one  thing  is  sure, 
and  that  is,  that  all  the  costs  connected  with  a  productive 
unit  should  be  considered  an  expense.  Some  hold  that  the 
total  charge  to  expense  (including  maintenance)  should  be 
made  as  nearly  a  uniform  operating  burden  as  possible ;  others 
favor  methods  giving  a  periodic  charge  which  varies  consid- 
erably from  a  straight  line. 

The  student  should  thoroughly  understand  that  a  dur- 
able productive  unit,  although  more  or  less  gradually,  never- 
theless inevitably,  gives  up  its  utility.     The  date  of  that  ex- 


PROBLEMS    IN    ACCOUNTING 


109 


haustion,  as  suggested  above,  cannot  be  settled  definitely  in 
a  dynamic  order  like  the  present  one.  Other  things  being 
equal,  however,  it  might  be  said  that  a  property  renders  its 
service,  and  so  declines  in  value,  in  a  degree  measured  roughly 
by  the  quotient  of  its  cost  less  salvage  value  over  the  time 
which  it  may  reasonably  be  expected  to  be  serviceable.  If 
properly  maintained,  the  efficiency  of  an  asset,  on  the  other 
hand,  may  remain  almost  at  par  year  after  year,  or,  at  any 
rate,  somewhere  within  80  per  cent,  of  par.  One  of  the  chief 
difficulties  in  actual  practice  is  the  determination  of  the  date 
when  an  asset  should  be  discarded  as  economically  unpro- 
ductive. However  rough  the  estimate  of  this  date  which 
must  be  made  when  the  asset  is  purchased,  it  is  necessary  for 
accounting  purposes  to  proceed  as  if  it  is  correct.  As  the 
estimated  date  of  abandonment  draws  near,  it  may  be  evi- 
dent that  the  estimate  was  far  from  the  truth.  Replacement 
costs  and  the  efficiency  of  new  units  are  significant  consid- 
erations at  this  time. 

It  is  not  implied  here  that  the  effective  value  of  the  fixed 
property  is  even  roughly  the  difference  between  original  cost 
and  accrued  depreciation  of  that  cost.  Competitive  replace- 
ment is,  of  course,  significant  as  the  value  figure  which  affects 
the  possible  selling  price  of  the  commodity  produced.  The 
position  taken  is  that  the  entrepreneur  cannot  advantageously 
adjust  the  carrying  value  of  his  properties  to  changing  re- 
placement costs.  It  is  simply  the  business  of  the  entrepreneur 
to  assume  the  burden  of  irregularity  of  costs,  and  he  cannot 
rationally  proceed  as  if  a  change  were  final  until  he  enters 
the  market  situation  as  a  buyer  or  a  seller. 

If  the  entrepreneur  has  the  proper  conception  of  his 
"income  period,"  if  he  understands  that  he  cannot  safely  treat 
each  year  as  a  final  but  only  as  a  provisional  determinant  of 
"entrepreneur  profits,"  then  it  is  probably  sufficient  for  him 
to  charge  operations  with  depreciation  based  on  a  reasonably 
expected  physical  life. 


110 


I 


! 


PROBLEMS    IN    ACCOUNTING 


There  are  several  interesting  methods  of  computing  the 
depreciation  which  should  be  periodically  charged  to  opera- 
tions.    The  "straight  line"  method  provides  for  charging  a 
fixed  percentage  of  the  original  depreciable  value  each  period. 
The  "diminishing  value"  method  sets  up  as  a  charge  a  fixed 
percentage  of  the  declining  value  of  the  asset,  or  the  differ- 
ence between  the  depreciable  value  and  the  depreciation  re- 
serve at  the  end  of  the  accounting  period.     This  method  is 
used  with  the  formula  that  the  rate  of  depreciation  equals 
1  minus  the  nth  root  of  the  salvage  value  over  the  original 
cost.    An  approximation  can  be  arrived  at  by  using  "the  sum 
of  the  years'  digits."     The  "sinking  fund"  method  provides 
for  the  establishment  of  a  replacement  fund,  the  first  charge 
to   depreciation   being   the   fixed    amount   of   cash    which    is 
periodically  placed   in   the  fund,   not  including  the   interest 
accumulation.     The  corresponding  credit  is  made,  of  course, 
to  the  Depreciation  Reserve  account.    To  complete  the  carry- 
ing out  of  this  method  it  is  necessary  to  debit  both  the  fund 
and  depreciation  expense,  the  amount  of  the  interest  accumu- 
lation, crediting  interest  and  the  reserve  each  a  like  sum.    It 
should   be   borne   in   mind   that   the   interest   earned   should 
always  be  credited  to  revenue,  and  not  to  the  reserve;  the 
item  belongs  to  revenue  and  should  not  be  accounted  for  as 
an  offset  to   depreciation.     The   total   cost  of  the  property 
should  be  made  to  enter  into  the  cost  of  the  product  through 
the  current  charge  to  operations.     Two  other  methods  of 
writing  off  depreciation  are  called  the  "annuity"  and  "com- 
pound interest"  methods. 

Problem  209 

Set  up  tables  illustrating  the  working  of  the  diflFerent 
methods  given  of  computing  the  periodic  charge  to  deprecia- 
tion. Use  simple  cases.  Criticize  each  one,  pointing  out 
fallacies,  if  you  see  any. 


PROBLEMS    IN    ACCOUNTING 


111 


Problem  210 

Draw  curves  representing  the  course  of  value  of  a  par- 
ticular fixed  asset  over  the  period  of  its  service  life,  conceived 
on  the  basis  of  original  cost  and  of  replacement  cost  and  of 
reproduction  cost,  and  relate  them  all  to  an  "efficiency"  curve. 

Problem  211 

Why  is  it  desirable  to  keep  distinct  the  various  items  of 
cost  in  the  construction  of  a  building  containing  boilers,  en- 
gines, shafting,  and  heating  plant?  In  the  erection  of  a 
building,  why  should  the  cost  of  the  foundations  be  kept  dis- 
tinct from  that  of  the  remainder  of  the  building? 

Problem  212 

State  whether  depreciation  is  an  element  of  cost  of  man- 
ufactured products.  If  so,  why?  Set  up  pro-forma  journal 
entry  necessary  to  carry  depreciation  on  the  books,  and  show 
how  it  should  be  exhibited  on  the  balance  sheet. 

Problem  213 

The  State  of  New  York  requires  telephone  companies  to 
maintain  a  Depreciation  Reserve  to  take  care  of  the  actual 
depreciation  of  tangible  assets.  The  Treasurer  of  a  certain 
telephone  company  reported  Cash  in  Bank  $15,000  among  his 
assets.  Among  his  liabilities  he  reported  a  loan  from  the 
same  bank  of  $12,000.  He  was  receiving  3%  interest  on  the 
cash  in  bank  and  paying  6%  interest  on  the  loan  from  the 
bank.  When  asked  why  he  did  not  use  the  cash  in  Bank 
instead  of  borrowing  he  replied:  "Your  requirement  with 
respect  to  Depreciation  Reserves  prevents  me  from  doing  so." 
Write  him  a  brief  letter  setting  him  right.  Tell  him  how  he 
should  keep  these  accounts. 

Problem  214 

How  would  you  cause  the  cost  value  of  tools  to  enter 
into  the  cost  of  the  product? 


I- 

4 


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112 


PROBLEMS    IN    ACCOUNTING 


Problem  215 

What  do  you  understand  by  the  term  "maintenance"? 

Defend  the  statement  that  Maintenance  should  be  charged 
not  when  the  repairs  are  actually  made,  but  should  be  spread 
on  some  uniform  basis  over  the  life  of  the  particular  item 
of  plant  involved. 

Problem  216 

When  auditing  the  books  and  accounts  of  a  concern 
operating  a  large  machine  shop  you  find  that  the  machinery 
and  tools  have  been  regularly  depreciated  each  year,  that 
their  value  as  shown  by  the  books  is  considerably  less  than 
the  value  as  shown  by  an  independent  appraisal,  and  that  the 
firm  has  set  up  the  higher  values  as  shown  by  the  appraisal 
on  the  books.  To  what  account  would  you  recommend  the 
corresponding  credit  to  go,  and  for  what  reasons? 

Problem  217 

The  accounts  of  a  certain  manufacturing  corporation  for 
the  year  ending  Dec.  31  showed  a  profit  of  $85,000  and  the 
directors  proposed  to  pay  $75,000  in  dividends  on  preferred 
stock.  The  holders  of  common  stock  brought  action,  alleg- 
ing that  the  value  of  the  property  had  depreciated,  and  a 
large  part  of  the  capital  of  the  company  lost  and  that  there 
could  not  be  any  profits  applicable  to  the  payment  of  a  div- 
idend until  such  loss  and  depreciation  had  been  made  good. 
Comment. 

Problem  218 

A  company  leases  for  a  term  of  fifty  years  certain  unim- 
proved property  for  factory  purposes,  paying  a  ground  rent 
therefor  of  $1,000  a  year.  The  company  erects  certain  build- 
ings at  a  cost  of  $40,000,  which  are  to  pass  to  the  owner  of  the 
fee  at  the  termination  of  the  lease.  Without  going  into  the 
mathematics  of  the  matter,  state  how  you  would  treat  this 
proposition  in  the  books  of  account. 


PROBLEMS     IN    ACCOUNTING 


113 


Problem  219 


A  railway  company  leases  the  property  of  another  rail- 
way company  for  a  period  of  50  years  and,  as  part  considera- 
tion for  the  lease,  agrees  to  expend  immediately  $250,000  on 
the  leased  property,  in  order  that  it  shall  have  a  greater  oper- 
ating efficiency.  At  the  termination  of  the  lease  the  property 
is  to  be  returned  to  the  lessor  in  the  same  condition  as  at  the 
time  of  making  the  lease,  subject  to  ordinary  wear  and  tear. 
What  entries,  if  any,  would  you  make  on  the  books  of  the 
lessor  in  respect  to  the  expenditure  of  the  $250,000,  and  why? 
What  entries  required  on  leasee  company  books? 

Problem  220 

"If  a  machine  can  be  said  to  be  obsolete  it  must  be  shown 
that  production  can  be  carried  on  more  cheaply  with  a  new 
machine  to  whose  cost  has  been  added  the  unrecovered  cost 
(less  salvage))  of  the  old  one."  Journal  of  Accounting,  Jan- 
uary, 1922.    Criticize. 

Problem  221 

Discuss:  "A  repair  is  the  replacement  of  a  part  of  an 
operating  unit."  "A  repair  is  any  alteration  made  upon  an 
operating  unit  which  does  not  materially  change  the  funda- 
mental make-up  of  that  unit."  "When  through  wear  and  tear 
or  through  casualty  it  becomes  necessary  to  replace  some 
part  of  any  structure,  facility,  or  unit  of  equipment,  and  the 
extent  of  such  replacement  does  not  amount  to  a  substantial 
change  of  identity  of  such  structure,  the  replacement  of  such 
part  is  to  be  considered  a  repair,  and  the  cost  of  such  repair 
is  to  be  treated  as  an  operating  expense,  and  must  not  be 
charged  as  a  replacement  in  any  capital  account." 


Problem  222 

Under  what  circumstances  would  the  "replacement  pol- 
icy" of  recognizing  depreciation  be  an  adequate  one? 


114 


PROBLEMS     IN     ACCOUNTING 


Problem  223 

What  general  criticism  have  you  to  make  against  con- 
sidering the  element  of  interest  in  making  the  depreciation 
charge?  Consider  with  special  reference  to  the  sinking  fund, 
the  annuity,  and  the  compound  interest  methods. 

Problem  224 

Argue  in  favor  of  spreading  fixed  capital  costs  uniformly 
over  the  life  of  a  capital  unit. 

Problem  225 

What  considerations  probably  determine  the  date  when 
a  fixed  asset  should  be  discarded? 

Assume  the  following  cases  : 

(a)  No  change   in  replacement  costs,   nor   in   the  effi- 
ciency of  new  units; 

(b)  A  change  in  replacement  costs,  but  none  in  effi- 
ciency ; 

(c)  A  change   both   in   replacement   costs   and   in   effi- 
ciency ; 

(d)  A  change   in   efficiency,   but   none   in   replacement 
costs. 

Problem  226 

Argue  against  attempting  to  consider  "obsolescence," 
"inadequacy,"  and  "accident"  in  forecasting  the  service  life 
of  a  fixed  asset. 

Problem  227 

Explain  fully  why  the  fixed  assets  (particularly  the  fixed 
tangibles)  present  more  difficult  problems  of  valuation  than 
do  the  current  assets. 

Problem  228 

The  following  is  a  published  balance  sheet  of  the  A.  B. 
Co.  at  the  end  of  its  fifth  year  of  operation : 


PROBLEMS    IN    ACCOUNTING 


116 


Assets 

Real  Estate  $100,000 

Buildings 150,000 

Machinery 170,000 

Notes  Receivable  . . .  60,000 

Accounts  Receivable.  19,000 

Supplies 5,000 

Merchandise   90,000 

Cash 46,000 


Liabilities 
Capital    Stock    (com* 

mon) $250,000 

Capital     Stock     (pre- 
ferred)   250,000 

Bonds 100,000 

Accounts  Payable 20,000 

Surplus 20,000 


$640,000  $640,000 

No  account  of  depreciation  has  been  taken.  Dividends  have 
been  declared  regularly  on  the  6%,  non-cumulative,  pre- 
ferred stock,  but  nothing  has  been  paid  on  the  common.  The 
accrued  depreciation  on  buildings  and  machinery  amounts  to 
$75,000. 

(a)  Restate  the  balance  sheet,  making  the  proper  cor- 
rections. 

(b)  Suppose  that  you  were  a  common  stockholder  in 
this  company,  would  you  have  reason  to  object  to  the  payment 
of  the  preferred  dividends?     Explain  fully. 

(c)  Suppose  that  the  Company's  real  estate  had  doubled 
in  value  during  the  past  5  years,  would  you  alter  your  position 
in  regard  to  the  actions  of  the  board  of  directors?  Restate 
the  balance  sheet  in  accordance  with  this  assumption,  carry- 
ing the  real  estate  at  its  proper  figure.  Should  appreciation  in 
real  estate  be  used  to  offset  depreciation  of  other  assets? 

Problem  229 

"No  piece  of  machinery  can  depreciate  below,  say,  thirty 
per  cent  of  its  cost  new.  There  is  a  point  below  which  it  is 
practically  impossible  to  operate  a  machine  and  this  is  seldom 
less  than  seventy  per  cent.  Hence  any  attempt  to  place  a 
valuation  on  a  property  of  less  than  seventy  per  cent  of  cost 
is  absurd."     Write  a  statement  showing  the  confusion  of 


1ii-1 


116         PROBLEMS    IN    ACCOUNTING 

terms  involved  in  the  quotation.  Show  by  the  use  of  graphs 
that  it  is  entirely  logical  to  place  a  value  below  seventy  per 
cent  at  the  same  time  that  the  operating  efficiency  is  above 
that  figure. 

Problem  230 

It  is  sometimes  urged  that  depreciation  should  be  charged 
roughly  as  a  function  of  gross  revenue  in  order  to  maintain 
a  fairly  even  flow  of  net  revenue.  Discuss.  Is  it  the  purpose 
of  accounting  to  equalize  the  showing  of  net  revenue  between 
periods? 

SECTION  VI.    The  Interest  Problem. 

To  be  able  to  attack  the  interest  problem  with  success 
it  is  highly  desirable  that  the  student  have  a  pretty  good 
working  knowledge  of  the  mathematics  of  interest.  There  are 
ways  in  practice,  of  course,  of  arriving  at  a  fairly  adequate 
solution  of  the  problem  without  making  an  elaborate  analysis 
of  the  facts  according  to  what  is  mathematically  accurate. 
It  is  true,  however,  that  the  student  should  equip  himself 
to  recognize  what  is  and  what  is  not  strictly  speaking  correct, 
before  he  can  wisely  consent  to  a  mere  approximate  account- 
ing for  a  business  transaction  involving  interest  in  any  of  its 
complicated  phases. 

One  of  the  chief  difficulties  of  the  problem  arises  in  con- 
nection with  the  evaluating  and  the  carrying  of  bonds.  The 
usual  type  of  bond  studied  in  brief  discussions  of  the  inter- 
est problem  is  the  straight  maturing  bond.  It  is  important, 
however,  for  the  student  not  to  omit  careful  consideration 
of  the  serial  and  the  annuity  bond.  Bond  types  will  be  dis- 
cussed in  class. 

Closely  related  to  the  difficulty  of  accounting  for  the  bond 
loan  is  that  which  is  presented  by  the  annuity  and  by  the  long 
term  non-interest  bearing  note. 

In  all  these  cases  the  accountant  should  seek  properly 
\o  show  the  accruing  or  diminishing  liability  or  asset,  as  the 


PROBLEMS    IN    ACCOUNTING        l!-? 

case  may  be,  and  the  correct  corresponding  charge  or  credit 
to  the  interest  account.  The  integrity  of  the  balance  sheet 
and  of  the  income  account  should  be  as  carefully  preserved 
here  as  elsewhere  in  accounting. 

The  student  should  know  what  is  meant  by  the  follow- 
ing terms  and  phrases,  and  be  able  to  demonstrate  his  knowl- 
knowledge :  (1)  actuarial  tables,  (2)  the  present  value  of  $1 
due  n  years  years  hence,  (3)  the  amount  of  $1  due  n  years 
hence,  (4)  bank  discount,  (5)  simple  and  compound  discount, 
(6)  simple  and  compound  interest,  (7)  the  present  value  of 
an  annuity  of  $1  for  n  years,  (8)  the  annuity  which  $1  will 
purchase  for  n  years,  (9)  the  amount  of  an  annuity  of  $1 
for  n  years,  (10)  the  annuity  which  will  amount  to  $1  in  n 
years,  (11)  the  bid  price  of  a  bond  sold  at  varying  yield  rates, 
(12)  the  yield  rate  of  a  bond  sold  at  a  price,  (13)  the  price 
of  a  bond  between  interest  dates,  (14)  amortization  and  ac- 
cumulation schedules,  (15)  bond  premises  and  bond  discount, 
(16)  lease,  (17)  bond  tables,  (18)  sinking  fund,  (19)  nominal 
and  effective  interest,  (20)  conversion  interval,  (21)  payment 
interval. 

Problem  231 

Look  up  the  "Bonds  Outstanding  Method"  of  amortiza- 
tion and  accumulation  explained  in  Dickinson's  "Accounting 
Practice  and  Procedure."  Under  what  circumstances  would 
it  be  the  best  method  to  use? 

Problem  232 

The  present  value  of  an  annuity  of  $1.00  for  four  periods 
at  two  per  cent,  is  $3.8077287. 

What  is  the  value  on  January  1,  1914,  of  a  5%  per  annum 
bond  issue  of  $100,000  bought  on  a  4%  per  annum  basis 
(semi-annual  coupons)  due  January  1,  1916? 

Prepare  amortization  schedule. 

Make  the  accounting  entries  for  the  first  interest  date 
in  the  journal  of  the  issuing  company. 


m 


i 


118 


PROBLEMS     IN    ACCOUNTING 


Problem  233 

Certain  6%  bonds  maturing  February  1,  1944,  interest 
payable  semi-annually,  contain  an  option  to  the  effect  that 
the  issuing  corporation  has  the  right  to  redeem  them  at  110 
on  or  after  February  1,  1929.  Compute  the  value  of  these 
bonds  as  at  February  1,  1919,  on  a  5  per  cent,  basis. 

The  present  value  at  2J^  per  cent  of  $1  due  50  periods 
hence  is  $0.290942208 ;  the  present  value  of  $1  due  20  periods 
hence  at  2>^  per  cent  is  $0.610270943. 

Problem  234 

What  entries  would  you  make  if  the  issuing  company 
for  which  you  work  should  redeem  its  bonds  at  a  price  more 
than  book  value?    At  a  price  less  than  book  value? 

Problem  235 

What  is  the  duty  of  a  trustee  with  respect  to  distributing 
the  bond  "dividend"  between  "life-man"  and  "remainder- 
man"? Consider  in  connection  with  estate  bonds  originally 
bought  at  a  discount,  at  par,  and  at  a  premium. 

Problem  236 

A.  In  1910  a  trustee  buys  for  investment  $10,000.00  (par 
value)  Penna.  R.  R.  6%  bonds  due  1921  at  112.  At  the  end 
of  six  months  he  receives  $300.00.  How  much  does  a  life 
tenant,  who  is  entitled  to  all  of  the  "income,"  receive? 

B.  He  buys  100  shares  Penna.  R.  R.  stock  at  112.  At 
the  end  of  six  months  he  receives  a  dividend  of  $300.00.  How 
much  does  the  life  tenant  receive? 

Problem  237 

A  corporation  issues  5%  20-year  bonds  to  the  par  value 
of  $2,000,000,  at  92.  Seven  years  later  the  company  provides 
for  a  new  issue  of  5%  30-year  bonds  to  be  used  partly  in 
refunding  the  outstanding  bonds  and  partly  in  raising  new 
capital.  The  $2,000,000  of  old  bonds  are  refunded  by  exchang- 
ing for  them  new  bonds  of  the  same  par  value  and  $140,000 
($7.00  per  $100.00  bond)  in  cash. 


PROBLEMS     IN    ACCOUNTING 


119 


(a)  What  did  the  company  realize  on  the  $2,000,000  of 
new  bonds? 

(b)  What  entries  would  you  make  at  the  time  of  this 
refunding  operation? 

Problem  238 

The  theoretical  book  value  of  a  5%  bond  on  January  1st 
is  $10,136.47  (on  a  basis  of  4%),  and  that  is  what  you  pay 
for  it.  The  value  on  July  1  is  $10,089.20.  On  July  1  you 
receive  as  interest  on  the  bond  $250,  or  at  the  rate  of  5%  a 
year. 

What  should  you  credit  on  your  books  for  that  $250? 

On  August  1  you  buy  another  $10,000  of  these  bonds  for 
$10,122.83,  which  includes  accrued  interest.  The  theoretical 
book  value  of  the  bond  for  the  subsequent  Jan.  1  is  $10,040.98. 

What  will  you  debit  at  the  time  of  purchase? 

What  should  you  credit  when  the  $250  interest  on  the 
last  purchase  is  received  on  January  1? 

Problem  239 

A  corporation  has  outstanding  $20,000,000  first  mortgage 
bonds,  interest  7%,  payable  semi-annually  on  January  1st 
and  July  1.    These  bonds  fall  due  as  follows: 

$5,000,000  on  Jan.   1,   1918 
5,000,000  on  Jan.   1,  1920 
5,000,000  on  Jan.  1,  1922 
5,000,000  on  Jan.  1,   1924 
This  $20,000,000  issue  is  to  be  refunded  as  of  January  1, 
1916,  on  a  3J/^%  basis.    Allowance  is  to  be  made  for  the  differ- 
ence in  interest  for  the  remainder  of  the  lives  of  the  various 
bonds,  and  such  difference  is  to  be  paid  in  bonds. 

(a)  What  amount  of  bonds  must  be  issued? 

(b)  This  same  corporation  has  outstanding  $10,000,000 
of  income  bonds  bearing  5%  interest.  The  auditor  decides 
that  the  Old  Bond  account  should  be  debited  $20,000,000,  and 
the  New  Bond  account  credited  the  whole  amount  of  the 
issue, — the  excess  of  the  new  over  the  old  bonds  being  charged 


il 


r. 


Ift 


120 


PROBLEMS     IN    ACCOUNTING 


against  income  for  1914.    The  entries  are  made  accordingly. 

As  a  result  of  this  entry  no  net  income  was  left  to  pay  the 
interest  on  the  income  bonds. 

Have  the  income  bondholders  any  redress  in  the  matter? 

(c)  What  will  be  the  proper  journal  entries  at  the  time 
of  the  refunding? 

(d)  What  will  be  the  proper  journal  entries  on  July  1, 
1916,  and  on  Jan.  1,  and  July  1,  1917  to  1924? 

Problem  240 

Fill  in  the  missing  items  in  the  following  table  and  tell 
how  you  know  what  items  to  add: 
Market  Int.   Bond  Int.    Accumulation    Book  Value         Par 

$98,558.06       $100,000 
$1,971.16         $1,500.00 
1,980.58  1,500.00 

1,990.20  1,500.00 

Could  you  fill  in  the  accumulation  column  directly,  with- 
out calculating  or  using  the  market  interest,  if  you  knew  the 
market  interest  rate  ?    If  so  how  ? 

Problem  241 

A  corporation  issues  $100,000  of  5%  bonds,  payable  in 
fifteen  years,  with  interest  payable  semi-annually,  and  receives 
$105,411.33.  This  gives  a  4i^%  basis.  Six  months  later  the 
corporation  pays  interest  on  the  bonds  amounting  to  $2,500. 

What  entry  should  the  holder  of  a  $1,000  bond  make  in 
his  books  when  he  receives  his  first  interest? 

What  entry  should  the  corporation  make  when  it  pays 
its  first  interest,  and  how  does  that  entry  aflfect  its  income 
sheet,  or  its  balance  sheet,  or  both? 

Problem  242 

Describe  a  sinking-fund.  How  should  the  account  of  such 
a  fund  be  conducted  in  the  case  of  a  manufacturing  corpora- 
tion that  bonds  its  works  for  $100,000,  payable  in  20  years,  and 
wishes  to  accumulate  during  that  period  the  sum  necessary  to 


PROBLEMS    IN    ACCOUNTING 


121 


retire  the  bonds  at  maturity?    What  amount  must  be  charged 
the  first  two  years,  assuming  the  interest  rate  to  be  4%  ? 

Problem  243 

A  mercantile  company  buys  the  leasehold  to  a  site  for 
$10,000.  The  leasehold  has  5  years  to  run.  How  would  you 
treat  this  transaction  in  the  accounts  (a)  at  the  time  of  pur- 
chase, (b)  each  year  during  the  remaining  life  of  the  lease- 
hold?   Give  entries. 

Problem  244 

A  corporation  sells  its  first  mortgage  bonds  at  $10,000 
premium  and  its  second  mortgage  bonds  at  $10,000  discount. 
Give  your  views  as  to  the  proper  treatment  of  these  items  of 
premium  and  discount. 

Problem  245 

A,  the  owner  of  a  certain  property,  leased  it  to  B  for  a 
period,  of  twenty  years,  at  an  annual  rental  of  $2,000,  payable 
in  advance.  B  occupied  the  property  for  ten  years,  during 
which  time  in  the  vicinity  advanced  materially.  C  desired  to 
rent  the  property  on  the  basis  of  $3,000  per  year,  and  offered 
to  pay  B  in  cash  immediately  for  his  equity  in  the  lease  com- 
muted at  5%.  The  offer  was  accepted  and  the  lease  was 
assumed  by  C  with  the  consent  of  all  parties. 

What  payments  did  C  make  to  B  ?  Show  in  tabular  form 
the  annual  journal  entries  made  by  C  in  respect  to  the  rent, 
and  the  diminishing  annual  balances  of  the  leasehold  account. 

Problem  246 

Give  your  understanding  of  the  terms  explicit  and  im- 
plicit interest.  How  are  the  two  involved  in  the  product  of 
business  operation? 

Problem  247 

Support  the  contention  that  bond  interest  is  a  return  to 
capital  and  not  a  cost  of  operation,  but  that  commercial  in- 
terest, so-called,  is  such  a  cost.    Oppose  the  latter. 


, 


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122 


PROBLEMS     IN     ACCOUNTING 


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Problem  248 

An  advertisement  of  a  well-known  make  of  automobile 
appearing  in  a  magazine  some  time  ago  had  in  it  a  statement 
which  ran  somewhat  as  follows: 

"We  have  no  bonds  outstanding  on  which  interest  must  be 
paid.    Most  of  our  competitors  do  have  bonds  outstanding  on 
which  the  fixed  charge  must  be  regularly  paid.    Our  costs  are 
therefore  lower,  of  course,  and  we  can  sell  at  a  lower  price." 
Comment. 

Problem  249 

"When  a  closing  date  comes  between  'interest'  payment 
dates,  it  is  important  that  the  true  charge  to  interest  be  ac- 
crued but  it  is  not  necessary  to  accrue  the  premium  amortiza- 
tion." 

Explain  fully. 

Problem  250 

Prepare  a  bid  for  an  issue  of  $100,000  of  the  X  Co's  5-year, 
4%  bonds,  interest  payable  semiannually,  on  a  6%  and  8^ 
basis,  respectively,  interest  convertible  semiannually. 

Problem  251  • 

The  A  Co.  issued  $100,000  (par  value)  of  6%,  10-year 
bonds,  interest  payable  semi-annually,  on  June  1,  1921,  for 
$107,795.  This  price  is  sufficient  to  yield  the  investor  a  rate 
of  5%. 

(a)  Give  the  entries  on  the  A  Co.'s  books  to  record,  in 
summary,  the  issue  of  these  bonds. 

(b)  Give  the  entries  recording  the  payment  of  the  semi- 
annual interest  on  Dec.  1,  1921,  and  June  1,  1922. 

Problem  252 

The  Eastern  Trust  Company  receives  an  estate  amount- 
ing to  $105,411.33.     There  are  two  heirs,  A  and  B.     A  is  to 


PROBLEMS     IN    ACCOUNTING 


123 


receive  the  entire  income  from  the  estate  during  her  life; 
B  is  to  receive  the  principal  ($105,411.33)  at  the  time  of  A's 
death.  The  estate  is  invested  in  $100,000  of  5%  bonds,  pay- 
able in  15  years,  with  interest  payable  semi-annually.  This 
gives  an  effective  yield  of  4J/2%. 

(a)  Assuming  that  the  trust  company  turns  over  the 
income  of  the  estate  to  A  once  a  year,  and  ignoring  the  Com- 
pany's commission,  give  the  journal  entries  covering  the  pay- 
ment of  the  first  year's  income  on  the  books  of  the  trustee. 

(b)  Suppose  that  for  3  years  the  Company  pays  over 
as  income  to  A  the  entire  amount  of  the  bond  annuities,  and, 
suppose  further,  that  at  the  end  of  the  3  years  the  estate 
reverts  to  B.  The  trust  company  sells  the  above  bonds  and 
pays  B  the  full  amount  of  the  estate.  Assuming  no  change 
in  interest  rates,  what  is  the  loss  to  the  trustee?  Give  jour- 
nal entries  on  the  Company's  books  covering  the  sale  of  the 
bonds  and  the  payment  to  B. 

Problem  253 

A  corporation  issues  a  block  of  20-year,  7%  bonds  at  a 
market  rate  of  6%,  realizing  $111,500.  Assuming  that  inter- 
est is  paid  semi-annually  and  that  the  corporation  closes  its 
books  only  on  interest  payment  dates,  give  the  journal  entries 
on  the  corporation's  books  at  date  of  issue,  the  first  two  inter- 
est payment  dates,  and  at  maturity. 

Suppose  the  books  of  this  company  were  closed  3  months 
after  the  issue  of  the  bonds  and  again  3  months  later.  Give 
the  journal  entries  with  respect  to  these  bonds  and  the  interest 
thereon,  under  this  assumption,  at  these  two  closing  dates. 

State  precisely  the  significance  of  this  bond  premium,  and 
show  the  effect  of  a  neglect  to  amortize  it. 

Problem  254 

(a)  It  is  the  practice  of  some  corporations  to  charge  dis- 
count on  bonds  to  Surplus  account  at  the  date  of  issue.    Dis- 


INFORMATION    OBSCURED 


ill  I 


124 


PROBLEMS    IN    ACCOUNTING 


cuss.  Show  that  if  the  discount  were  of  significant  amount 
the  rights  of  particular  investors  and  classes  of  investors  might 
be  disturbed  by  such  a  practice. 

(b)  Would  you  object  to  the  practice  of  charging  dis- 
count on  capital  stock  issued  directly  to  undivided  profits? 
Explain  the  difference  between  discount  on  bonds  and  dis- 
count on  stocks. 

Problem  255 

The  price  paid  for  an  issue  of  $100,000,  par,  of  20-year 
4%  bonds,  interest  payable  semi-annually,  was  $93,411.61. 
What  rate  of  interest  was  used  in  this  valuation  ? 

Problem  256 

The  X  Railroad  Co.  has  paid  a  6%  dividend  on  its  stock 
for  several  years.  There  is  every  indication  that  it  will  pay 
this  rate  continuously  in  the  future.  Assuming  that  this  sort 
of  investment  should  yield  the  investor  8%,  what  would  be 
the  value  of  the  stock,  the  par  value  being  $100? 

Problem  257 

On  January  1,  1920,  the  A  Company  issues  a  5-year  note 
which  carries  no  periodic  interest  payments  and  which  calls 
for  the  payment  of  $100,000  at  maturity.  This  security  is 
"sold"  on  an  S%  basis,  interest  convertible  semi-annually,  the 
proceeds  being  $67,556.42.  The  Company's  accountant  charges 
cash  $67,556.42,  debits  surplus  $32,443.58,  and  credits  notes 
payable  for  $100,000. 

(a)  Show  that  this  procedure  creates  a  "secret  reserve." 
Give  a  general  definition  of  the  secret  reserve. 

(b)  Adhering  to  the  plan  that  he  has  initiated,  what 
entries  will  the  Company's  accountant  make  during  the  life 
of  this  note  and  on  January  1,  1925?  Show  precisely  why 
this  accounting  is  improper  from  the  standpoint  of  income 
sheet  and  balance  sheet. 

(c)  Assuming  that  the  accountant  had  charged  dis- 
count instead  of  surplus  and  then  had  neglected  to  account 


PROBLEMS     IN    ACCOUNTING 


125 


for  accumulation  what  entries  would  he  of  necessity  make 
at  maturity?  Show  that  this  accounting  is  more  seriously 
inadequate  than  the  procedure  given  above. 

(d)  Assuming  that  the  A  Company  closes  its  books  on 
June  30  and  December  31,  exhibit  the  journal  entries  with 
respect  to  the  note  described  above  which  should  be  made  on 
January  1,  June  30,  and  December  31,  1920 ;  and  on  January  1, 
1925. 

Problem  258 

On  January  1,  1921,  the  B  Company  issues  an  S%  $100,- 
000,  10-year  bond,  "interest"  payable  semi-annually,  on  a  6% 
basis,  convertible  semi-annually.  Assuming  that  the  Com- 
pany closes  its  books  on  June  30  and  December  31,  give  the 
journal  entries  with  respect  to  this  bond  on  January  1,  June 
30,  July  1,  and  December  31,  1921.  (The  value  of  $1  due  in 
20  periods  at  3%  is  $0.5536758.  The  value  of  an  annuity  of 
$1  per  period  for  20  periods  at  3%  is  $14.8774749.) 

What,  precisely,  is  the  nature  of  the  "Bonds-Premium" 
account?  Why  is  it  desirable,  from  the  standpoint  of  both 
income  sheet  and  balance  sheet,  to  amortize  bond  premium 
in  a  systematic  manner?  Show  carefully  the  impropriety  of 
treating  unamortized  premiums  as  "unearned  ii)^me"  and 
the  amount  of  the  periodic  amortization  as  "earnefl"  income. 

Problem  259 

A  company  has  acquired  machinery,  which  cost  $100,000, 
which  it  expects  to  be  able  to  use  for  10  years.  The  scrap 
value  at  the  end  of  that  time  is  estimated  at  $25,000.  A  bond 
issue  of  $75,000  due  in  10  years,  bearing  6  per  cent,  interest 
and  secured  by  a  mortgage  on  the  machinery,  was  floated  at 
98  soon  after  the  purchase  of  the  machinery.  The  trust  in- 
denture requires  that  at  the  end  of  each  year,  before  the  pay- 
ment of  dividends,  a  sum  shall  be  set  aside  and  charged 
against  earnings  sufficient  to  provide  a  sinking  fund  on  a  5 
per  cent,  basis  for  the  redemption  of  the  bonds  at  maturity. 


ii'1 


126 


PROBLEMS     IN    ACCOUNTING 


The  president  of  the  company  is  in  favor  of  providing 
a  reserve  for  depreciation  on  the  machinery  by  the  sinking- 
fund  method,  using  5  per  cent,  as  a  basis,  although  he  does 
not  advocate  creating  a  replacement  fund  for  the  machinery 
as  well  as  a  sinking  fund  for  the  bonds.  The  treasurer  con- 
tends that  it  is  not  necessary  to  provide  any  reserve  for  de- 
preciation, asserting  as  his  reason  that  the  creation  of  a 
sinking-fund  reserve  and  a  reserve  for  depreciation  would 
involve  a  double  charge  against  profits  and,  further,  that  as 
the  sinking-fund  reserve  is  obligatory  the  depreciation  reserve 
is  not  required. 

(a)  Compute  the  amount  of  the  annual  contribution  to 
the  sinking  fund  for  the  redemption  of  the  bonds. 

(b)  Set  up  a  table  showing  the  accumulation  of  the 
fund,  on  the  assumption  that  it  earned  exactly  5  per  cent. 

Also  indicate  the  annual  entries  for  the  sinking  fund  and 
for  the  sinking-fund  reserve. 

(c)  Give  your  opinion  as  to  whether  or  not  there  should 
be  a  reserve  for  depreciation  as  well  as  a  sinking-fund  reserve. 
If  the  sinking-fund  reserve  is  sufficient,  what  disposition  will 
eventually  be  made  of  it?  If  two  reserves  are  necessary,  when 
and  in  what  manner  will  they  be  closed  out? 

.  1.05^0=1.62889463. 

Problem  260 

Criticize  the  following  practices: 

(a)  Treating  bond  discount  as  "prepaid  interest"; 

(b)  Treating  bond  premium  as  deferred  revenue ; 

(c)  Charging  or  crediting  bond  discount  or  premium 
at  the  beginning  of  the  bond  term  directly  to  surplus;  same 
at  the  end  of  the  bond  term. 

Section  VII.  (a)  Thus  far  these  problems  have  had  to 
do  with  accounting  for  a  "going"  concern.  When  we  think 
of  "business"  we  of  course  think  of  buying  and  selling  and 
profit-making;  in  short,  we  think  of  favorable  economic  oper- 
ation.    Some  of  the  most  difficult  of  accounting  problems, 


PROBLEMS     IN     ACCOUNTING 


127 


however,  grow  out  of  the  transactions  which  precede  busi- 
ness operation,  during  what  have  been  named  the  organiza- 
tion, construction,  and  developmental  periods;  others,  simi- 
larly unrelated  to  a  "going"  concern,  come  up  for  considera- 
tion subsequent  to  business  operation,  while  a  business  is  in 
process  of  dissolution  or  is  being  operated  by  an  officer  of 
the  court  of  equity. 

The  chief  problem  relating  to  the  periods  which  are  said 
to  exist  prior  to  "going"  days  may  be  summed  up  in  the  ques- 
tion: What  expenditures  are  properly  to  be  accounted  for 
as  additions  to  the  cost  of  properties,  either  of  specific  units 
of  property  or  of  the  general  property  of  the  business  as  a 
whole,  and  what  ones  are  best  accounted  for  as  offsets  to 
capital  or  as  deferred  debits  to  some  revenue  figure? 

Problem  261 

Write  a  brief  discussion  of  the  proper  treatment  of  or- 
ganization expenditures,  interest  during  construction  (explicit 
and  implicit),  dividends  during  construction,  taxes  paid  on 
property  during  construction,  and  take  up  in  some  detail  the 
theory  of  developmental  value. 

Problem  262 

Are  public  utilities  and  industrials  to  be  considered  as 
homogeneous  economic  units  in  dealing  with  the  problems 
of  pre-operating  periods?     Give  reasons  for  your  answer. 

Problem  263 

Discuss  the  following:  "The  entrepreneur  and  capitalistic 
functions  cannot  in  fact  be  divorced.  If  so,  in  a  given  case, 
the  separation  is  no  more  than  superficial,  and  the  return  to 
both,  implicit  and  explicit,  is  all  business  income.  A  partic- 
ular arrangement  of  capital  investment  can  be  explained 
simply  on  the  grounds  of  expediency." 

Problem  264 

Discuss  the  different  theories  concerning  the  treatment 
of  organization  costs  subsequent  to  the  beginning  of  opera- 
tions. 


«S 


128 


PROBLEMS     IN    ACCOUNTING 


Problem  265 

Look  up  the  ruling  of  the  I.  C.  C.  in  regard  to  the  cap- 
italization of  costs  prior  to  "receipt  or  the  completion  or  the 
coming  into  service  of  the  property"  constructed  as  the  oper- 
ating plant.  State  whether  you  would  consider  it  correct  to 
apply  such  a  ruling  to  the  general  situation  without  a  good 
deal  of  modification. 

Problem  266 

"In  arriving  at  the  cost  of  a  building,  every  item  which 
enters  into  its  construction,  or  is  caused  by  it,  is  a  legitimate 
element  of  the  cost."  "Every  expense  that  is  essential  to  the 
completion  of  a  building  (during  construction)  is  legitimately 
charged  to  its  cost."  Comment,  giving  the  different  items  of 
expenditure  which  are  "essential  to  the  completion"  of  a  build- 
ing. 

Problem  267 

;  Some  hold  that  discount  on  bonds  and  stock  sold  for 
construction  purposes  are  losses  and  should  be  capitalized  as 
a  property  cost.    Give  your  opinion. 

Problem  268 

Is  it  permissible  to  include  in  the  valuation  of  a  plant 
constructed  by  a  company's  own  employes  for  the  company's 
own  use,  an  amount  of  "profits"  sufficient  to  bring  the  plant 
valuation  to  an  amount  equivalent  to  the  "cost"  of  construc- 
tion by  outside  parties? 

Problem  269 

"The  theory  that  interest  paid  for  borrowed  money  should 
be  capitalized  is  incorrect.  In  effect  it  holds  that  an  asset 
costs  less  when  the  company  has  sufficient  capital  than  when 
it  has  not  enough.  Borrowing  money  follows  a  want  of  cap- 
ital, and  the  interest  is  the  price  of  capital,  not  of  construc- 
tion." Statement  made  by  same  writer  who  advocates  cap- 
italizing interest  paid  to  bondholders  during  construction 
period.     Is  it  sound? 


PROBLEMS     IN     ACCOUNTING 


129 


Problem  270 

Can  or  cannot  a  going  concern  employing  a  salaried  man- 
ager and  superintendents  charge  any  part  of  their  salaries 
to  cost  of  improvements  or  extensions  which  may  be  added 
to  the  plant  at  intervals?    Why? 

Problem  271 

"Whoever  would  hold  to  capitalizing  bond  interest  dur- 
ing construction  would  hold  that  the  return  on  business  cap- 
ital accrues  from  year  to  year,  and  that  there  was  no  such 
thing  as  the  business  function  of  assuming  the  burden  of 
irregularity  of  expenditure  and  of  the  results  of  expenditure. 
He  would  overlook  the  fact  that  a  particular  form  of  capital- 
ization is  simply  a  special  case  of  the  residual  owners  'trad- 
ing on  their  equity,'  and  that  the  responsibility  of  a  fixed 
accruing  return  rests  upon  them  and  not  upon  society."  Ex- 
plain fully. 

SECTION  VII  (b) 

The  principal  problem  which  comes  up  in  connection 
with  the  cessation  of  business  operation  has  to  do  with  the 
inability  or  the  failure  to  pay  debts,  making  it  necessary 
to  estimate  the  realizable  value  of  available  assets,  and  to  apply 
that  estimate  to  the  satisfaction  of  outstanding  liabilities  in 
the  order  of  their  rank,  thus  determining  the  estimated  defi- 
ciency to  those  creditors  who  legally  stand  in  a  residual  posi- 
tion. The  formal  estimate  and  determination  of  deficiency 
is  called  a  "statement  of  affairs."  An  account  showing  the 
specific  factors  contributing  to  a  deficiency  is  usually  pre- 
sented as  a  companion  exhibit. 

To  account  for  the  winding  up  of  a  business  a  form  of 
account  is  used  called  a  "realization  and  liquidation  account." 
The  same  account  is  used  for  recording  the  transactions  of 
receiver's  or  trustee's  operation  of  a  business  for  the  benefit 
of  creditors  when  the  plan  is  to  turn  the  business  back  to  its 
legal  owners  as  soon  as  it  is  solvent.     It  is  apparent,  then, 


m  I- 


t\ 


\ 


,   1 


130 


PROBLEMS     IN     ACCOUNTING 


that  such  an  account  may  be  based  on  the  going  values  of 
a  balance  sheet  or  the  forced  values  of  a  statement  of  affairs. 
These  statements  will  be  discussed  in  full. 

Problem  272 

Fat  &  Lean  have  been  forced  into  the  hands  of  a  receiver. 
From  their  books  and  the  testimony  of  the  insolvent  debtors 
the  following  statement  of  their  condition  at  December  31, 
1921,  is  ascertained : 

Cash  $     400 

Bonds,  Kadoo  Company 10,000 

Accounts  Rec 40,000 

Inventory  25,900 

Machinery  and  Equipment 18,000 

Buildings  30,000 

Notes  Payable  2nd  Nat'l  Bank 6,000 

Notes  Payable  State  Bank 4,000 

Notes  Payable  individuals 6,000 

Accounts  Payable   88,700 

Unpaid  wages  and  taxes 600 

Fat— Capital   11,000 

Lean— Capital 9,000 

The  following  appraisal  was  made  by  the  receiver : 

Inventory,  $22,900;  machinery  and  equipment,  $9,000; 
buildings,  $20,000;  and  bonds  at  their  face  value.  He  classi- 
fied the -accounts  receivable  as  $27,000  good,  $9,000  doubtful 
but  expected  to  produce  $4,000,  and  $4,000  bad.  The  bonds 
were  all  held  as  collateral  by  the  banks :  $5,000  with  the  2nd 
National  and  $5,000  with  the  State  Bank.  A  memorandum 
for  $100,  although  of  no  value,  was  found  to  have  been  con- 
sidered as  part  of  the  cash  on  hand. 

Prepare  a  statement  of  affairs,  showing  the  liabilities  and 
the  assets  with  respect  to  their  realization  and  liquidation; 
also  a  deficiency  account  showing  the  details  accounting  for 
the  deficiency. 


PROBLEMS    IN    ACCOUNTING        131 

Problem  273 

State  the  various  uses  to  which  a  statement  of  affairs 
may  be  put.  How  does  it  differ  from  a  balance  sheet?  De- 
fine the  following  terms  and  tell  how  they  should  be  treated 
in  a  statement  of  affairs: 

Preferential  liabilities,  contingent  liabilities,  fully  secured 
liabilities,  partially  secured  liabilities,  unsecured  liabilities. 

Problem  274 

Wallace  Hopkins,  while  perfectly  solvent  and  doing  a 
profitable  manufacturing  business,  had  so  tied  up  his  capital 
in  plant  materials  that  he  was  unable  to  pay  his  debts  and 
was  on  the  point  of  suspending  for  want  of  funds  to  pay  for 
labor,  and  his  creditors  were  preparing  to  commence  legal 
proceedings  to  enforce  a  settlement.  The  condition  of  his 
affairs  at  this  time  was  as  follows: 

Assets  Liabilities 

Plant $25,198     Creditors $20,230 

Cash 212    Capital 50,000 

Materials,    raw    and  Surplus 4,900 

partly  finished 40,400 

Finished  goods   6,070 

Accts.  Rec 3,250 


$75,130  $75,130 

At  a  meeting  of  the  creditors  he  said  that  while  his  plant 
was  entirely  efficient,  it  was  all  of  special  character  and  would 
realize  on  forced  sale  only  the  value  of  scrap,  that  the  unfin- 
ished goods  would  require  the  employment  of  skill  and  pro- 
cesses known  only  to  him,  and  that  while  forced  suspension 
would  yield  to  his  creditors  not  over  50%,  it  would  ruin  him 
absolutely. 

The  creditors  decided  to  advance  him  a  loan  of  $5,000 
to  continue  operations  and  allow  him  additional  credit  for 
materials  and  expenses.  A  trustee  was  appointed  to  see  that 
the  proceeds  were  used  solely  for  recuperation  of  the  business. 


1^ 


I 


)■ 


132         PROBLEMS     IN     ACCOUNTING 

The  subsequent  operations  of  the  trustee  were  as  follows : 
Purchases  on  book  account,  charged  to  materials  $5,100,  to 
expense,  $12,100;  sales  on  book  account,  $57,802;  losses  on 
bad  debts,  $300;  cash  receipts  (loan  from  creditors),  $5,000; 
settlement  from  debtors,  $58,100;  cash  payments  for  labor, 
$12,500 ;  for  expense,  $4,350 ;  for  plant,  $600.  Creditors,  $42,- 
030 ;  Wallace  Hopkins,  personal  drawings,  $3,000. 

There   remained    raw    materials   $4,000;    finished    goods, 

Prepare  (1)  realization  and  liquidation  account,  (2) 
trustee's  cash  account,  (3)  balance  sheet  of  the  estate  as  re- 
stored to  Wallace  Hopkins. 

Problem  275 

Sharp  &  Flat  have  been  in  business  as  contractors  for 
the  last  six  years.  Each  invested  $63,000  cash  and  was  to 
receive  one-half  of  the  gain  and  bear  one-half  the  losses  which 
for  the  entire  period  were  as  follows: 

Year  Gain  Loss 

1914   $15,000 

1915    18,000 

1916    21,852 

1917    1,500 

1918    $1,500 

1919    3,000 

Each  withdrew  from  the  business  for  private  use  $6,000 
per  year.  On  December  31,  1919,  an  assignment  was  made 
and  the  Assignee  obtained  the  following  information  in  addi- 
tion to  that  already  given,  from  which  he  proceeded  to  make 
a  statement  of  affairs  and  a  deficiency  account  to  be  placed 
before  the  creditors: 

Unsecured  creditors  on  open  account $  27,000 

Fully   secured   creditors    6,900 

Securities  held  by  above  consist  of  patents  valued  at.       9,000 
Partly  secured  creditors   105,000 


PROBLEMS     IN     ACCOUNTING         133 

Securities  held  by  above  consist  of  railway  shares, 

valued  at  60,000 

Wages  due 2,000 

Rent  due — not   preferred    400 

Bills  payable 60,000 

Book  debts    (good)    3,000 

Book  debts   (doubtful,  est.  worth  $225) 800 

Book  debts  (bad)  of  no  value 700 

Stock  in   trade    112,500 

Above  is  estimated  worth   66,600 

Plant  and  machinery  cost   120,000 

Above  estimate  to  produce 60,000 

Office   furniture    (Est.   $600) 900 

Bills  receivable  under  discount 10,000 

Estimated  liability  of  partnership  on  above 4,000 

Cash  in  bank  252 

From  the  facts  given  prepare  a  statement  of  affairs  and 
a  deficiency  account. 

Problem  276 

The  following  is  a  trial  balance  of  the  books  of  the  Cunard 
Corporation,  which  has  been  declared  bankrupt: 

Trial  Balance  at  June  30,  1920 

Dr.  Cr. 

Land  and  buildings $125,000 

Capital  stock  $300,000 

Machinery  and  equipment 160,000 

Customers*  accounts  rec 170,000 

Notes  payable  250,000 

Accounts  payable 309,000 

Accrued  wages   3,000 

Mortgage  on  building 65,000 

Notes  receivable  ..'. 26,000 

Interest  accrued  on  mtge 2,500 

Cash  on  hand  and  in  bank 9,500 

Inventory  raw  material 85,000 


n 


n 


^  i 


i" 

» 
ill 


134         PROBLEMS     IN     ACCOUNTING 

Inventory  finished  goods 121,000 

Investments  12,000 

Deficit 221,000 


$929,500  $929,500 
The  land  and  buildings  are  appraised  at  $101,000  and  the 
machinery  and  equipment  at  $135,000.  An  examination  of 
the  customers*  accounts  shows  the  following  condition :  Good, 
$95,000;  doubtful  (expect  to  collect  33>^%),  $51,000;  bad, 
$24,000.  The  holders  of  the  notes  payable  of  $12,000  hold 
notes  receivable  in  security  of  face  value  of  $15,000,  but 
worth  only  $10,000.  A  creditor  of  $55,000  on  open  account 
has  in  his  possession  the  stock  certificates  for  the  investments 
assigned  in  blank,  and  finished  goods  pledged  to  the  value 
of  $16,000.  An  examination  of  the  notes  receivable  shows 
$9,000.00  good  for  collection  and  $17,000.00  doubtful,  on 
which  50%  will  be  collected.  The  investments  have  a  market- 
able value  of  $16,500.00.  The  inventories  are  expected  to 
realize  book  values. 

Prepare  a  statement  of  affairs  for  submission  to  creditors 
showing  the  amount  on  the  dollar  which  they  may  expect 
to  receive;  also  prepare  a  deficiency  statement. 

Problem  277 

John  Thompson  exhibits  the  following  balance  sheet  of 
his  business,  dated  June  30,  1900 : 

Cash $      750    Sundry  creditors $  6,000 

Book  debts 9,500    Bills  payable   7,500 

Stock  on  hand 6,500    Bank  (overdraft) 3,000 

Fixtures,  etc 1,750    Balance  2,000 


Total $18,500       Total $18,500 

On  questioning  Thompson  it  was  found  that  he  had 
omitted  the  following  from  his  balance  sheet :  $250  owing  for 
rent;  $75  owing  for  taxes;  $2,500  borrowed  at  6%  from  his 
wife  three  years  ago,  no  payment  having  been  made  on  ac- 


PROBLEMS     IN    ACCOUNTING         135 

count  of  either  principal  or  interest ;  a  draft  for  $500  accepted 
by  a  firm  without  consideration,  falling  due  in  30  days.  His 
private  and  household  debts  amounted  to  $600. 

The  item  entered  on  his  balance  sheet  as  cash  included 
his  personal  I.  O.  U.'s  for  $600. 

Of  the  book  debts  about  $3,500  might  be  considered  bad 
and  the  rest  good.  The  stock  was  good  except  $1,000  which 
would  not  produce  more  than  $100.  The  fixtures,  if  sold, 
would  not  realize  more  than  $250.  The  only  other  assets 
were  household  furniture  worth  about  $1,250  and  residence 
valued  at  $7,500  subject  to  a  first  mortgage  for  $5,000  at 
4%,  and  also  a  second  mortgage  held  by  his  bank  as  security 
for  overdraft. 

Prepare  a  statement  of  affairs. 

Problem  278 

The  trial  balance  of  the  Yellow  Pine  Timber  Co.,  on  Jan- 
uary 1,  1912,  was  as  follows: 

Dr.  Cr. 

Cash $     2,618.03 

Accounts  Rec 21,111.17 

Inventory 36,133.32 

Unexpired  insurance   559.44 

Plant  and  equipment 352,109.75 

Timber  and  lands 551,539.31 

Preferred  claims  $  37,011.99 

First  Mtge.  Bonds  6's 212,500.00 

Bond  interest  accrued  6  months 6,375.00 

Unsecured   creditors    64,471.64 

Capital  stock  400,000.00 

Surplus 243,712.39 

$964,071.02         $964,071.02 

Since  the  company  was  unable  to  meet  its  current  obli- 
gations, the  Commercial  Trust  Co.  was  appointed  Receiver 
on  January  1,  1912. 


BMS 


k     \\ 


ii 


136 


PROBLEMS     IN    ACCOUNTING 


The  transactions  under  the  receivership  for  the  year 
following  were,  in  summarized  form : 

Purchased  logs  (half  of  which  were  paid  for  in  cash, 
less    cash    discounts,    and    the    remainder    on 

credit)    $     9.646.22 

Operating  expenses  202,972.81 

Commissions 4,214.14 

Demurrage  326.00 

Freight,  inward 585.53 

General  expenses   4,837.40 

Salaries 12,000.00 

Shipping  Expense 13,574.10 

Taxes 1,421.00 

All  paid  for  in  cash. 

Allowance  for  stumpage  cut  amounting  to  $50,000  was 
credited  to  the  timber  account.  Interest  on  bonds  to  Decem- 
ber 31,  1912,  was  paid  in  full  and  the  outstanding  bonds 
redeemed  to  $200,000,  December  31,  1912,  by  paying  off  $12,- 
500  at  101.  Sales  amounted  to  $450,000  gross,  of  which 
$300,000  was  received  in  cash  as  net  payment  by  customers. 

Freight  allowance  to  customers $70,510.00 

Discounts  allowed   556.33 

Discounts  received 500.00 

Profit  from  commissary  5,000.00 

Sundry  income   3,500.00 

The  accounts  receivable  of  January  1,  1912,  realized  $20.- 
000.00  net.  Preferred  claims  were  paid  in  full.  Depreciation 
of  $3,500  was  allowed  on  plant  and  equipment.  Unexpired 
insurance  on  December  31,  1912,  amounted  to  $125.  Inven- 
tories, $40,000. 

Prepare  a  realization  and  liquidation  account,  cash  ac- 
count, and  balance  sheet,  as  of  December  31,  1912. 

Prepare  a  Receiver's  Profit  and  Loss  account,  proving  the 
gain  shown  by  the  realization  and  liquidation  account,  and 
showing  all  of  the  elements  making  up  the  net  amount. 


PROBLEMS     IN    ACCOUNTING 


137 


SECTION  VIII.     Accounting  for  Holding  Companies  and 
Mergers. 

(a)  Accounting  for  the  holding  company  has  its  problem 
in  the  preparing  of  a  balance  sheet  which  will  reflect  the 
financial  condition  of  all  the  interests  effectively  under  one 
control,  without  regard  to  their  apparent  separation,  and  in 
the  drafting  of  an  income  statement  which  will  render  a  profit 
figure  expressing  the  true  realized  gain  of  the  "consolidation." 
In  practice  these  two  exhibits  are  distinguished  as  "consol- 
idated" statements. 

The  making  of  a  "consolidated"  balance  sheet  involves  the 
elimination   of   inter-company    accounts.      Among   these    are 
intercompany  loan  accounts  and  the  investment  account  on  the 
books  of  the  holding  company  offset  by  the  proprietary  ac- 
counts of  the  controlled  company.     In  the  two  ledgers  such 
accounts  are  related  essentially  as  reciprocal  balances.     The 
process  of  eliminating  the  latter  carries  with  it  consideration 
of  the  book  value  of  the  investment  at  the  date  purchased  and 
its  relation  to  the  purchase  price,  and  the  resulting  figure  of 
goodwill  or  addition  to  surplus  (or  deduction  from  goodwill), 
as  the  case  may  be,  of  the  combined  interests.     When  book 
value  at  acquisition  is  not  available,  the  elimination  is  accom- 
plished on  the  basis  of  values  given,  at  the  sacrifice,  however, 
of  some  adjustment  which  might  have  been  called  for  had  the 
book  value  been  known.    Minority  interests  are  best  exhibited 
as  a  certain  percentage  of  the  combined  asset  total.    The  in- 
vestment account  on  the  books  of  the  holding  company  is 
carried  either  at  cost  or  at  book  value.    If  at  cost,  the  adjust- 
ing of  the  consolidated  surplus  account  is  done  when  the  ac- 
count is  eliminated ;  if  carried  at  book  value,  the  adjusting  is 
effected   on   the   basis   of   the   controlled   company's   income 
statement  (corrected  for  intercompany  "profits")  and  of  actual 
dividends  declared  in  favor  of  the  holding  company.     In  the 
latter  case,  the  elimination  is  equivalent  to  cancellation  of  the 
offsetting  accounts  without  further  adjustment  being  neces- 
sary.    Certain  authorities  hold   to   carrying  the   investment 


\ 


i 


i' 


iH 


138 


PROBLEMS     IN    ACCOUNTING 


account  at  book  value.  It  should  be  noted  at  this  point,  how- 
ever, that  if  the  holding  company  owns  less  than  an  effectively 
controlling  interest,  the  investment  account  is  best  shown  un- 
altered at  cost  in  the  company's  balance  sheet,  and  the  various 
assets  and  liabilities  represented  by  the  account  disregarded 
entirely. 

The  "consolidated"  income  statement  should  be  so  made 
as  to  render  a  figure  of  profit  representative  of  the  results  of 
all  the  contributing  companies  conceived  as  a  unit.  Where 
there  is  a  duplication,  and  sometimes  a  triplication,  of  profits 
resulting  from  intercompany  transactions,  the  accumulation 
should  be  allowed  only  to  the  extent  of  actual  realization  in 
the  form  of  sales  to  "outside"  parties.  The  cost  of  goods 
sold  and  general  business  overhead  incurred  in  dealing  with 
interests  outside  the  holding  company's  control  should  be  off- 
set to  sales  made  to  outsiders  properly  to  measure  the  true 
income  of  the  "consolidation."  From  this  only  dividends 
paid  to  stockholders  of  the  holding  company  would  be  deduct- 
ible in  determining  the  surplus  remaining  to  the  "consolida- 
tion." The  remainder,  corrected  for  the  minority's  equity, 
could  then  be  reconciled  with  the  surplus  of  the  consolidated 
balance  sheet. 

Arriving  at  the  profit  figure  in  this  ideal  manner  may  be 
at  times  impracticable.  The  better  plan,  if  such  is  the  case,  is 
to  set  about  preparing  the  income  statements  of  the  individual 
companies  as  quite  spearate  entries,  allowing  them  to  show 
intercompany  gains,  and  then  carefully  to  eliminate,  in  a  com- 
panion statement,  the  holding  company's  proportion  of  the 
intercompany  profits  which  have  resulted  from  intercompany 
purchase  and  sales  transactions.  The  latter  step  will  give  the 
amounts  which  should  be  charged  to  the  consolidated  surplus 
as  first  determined  on  the  basis  of  the  unadjusted  subsidiary 
balance  sheets,  and  which  should  be  credited  in  the  consoli- 
dated balance  sheet  as  an  offset  to  the  overstated  inventories. 
Minority  interests  are  of  course  entitled  to  their  share  of  inter- 
company gains  as  shown  by  their  particular  companies. 


PROBLEMS    IN    ACCOUNTING         139 

The  problems  which  follow  are  illustrative  of  the  prin- 
ciples involved  in  the  preparation  of  the  consolidated  balance 
sheet. 

Problem  279 

Company  K,  as  represented  in  the  following  exhibit  of 
balance  sheets,  is  a  holding  company  owning  all  the  stock  in 
subsidiary  X.  Consolidate  the  two  balance  sheets  so  as  prop- 
erly to  reflect  the  financial  condition  of  the  unity  of  business 
interests.  Now  assume,  as  a  new  problem,  that  company  K 
owns  all  the  assets  of  company  Y,  and  consolidate  the  two 
statements.  Again,  assume  that  company  Z  is  the  subsidiary, 
and  that  company  K  holds  80%  of  the  stock. 

BALANCE  SHEETS 
Assets 

K  (1)  X  (2)  Y  (3)  Z 

Company  Company  Company  Company 

Plant  Property $250,000  $100,000  $150,000  $210,000 

Investment  in  Sub- 
sidiary (cost) 125,000 

Inventories    30,000  20,000  40,000  50,000 

Accounts  Rec 20,000  30,000  45,000  20,000 

Company  X 10,000 

Cash 10,000  10,000  25,000  10,000 

$445,000     $160,000  $260,000  $290,000 
Liabilities 

Accounts  Pay  $  45,000    $  25,000  $  30,000  $  50,000 

Company  K 10,000 

Capital  Stock   300,000       125,000  100,000  150,000 

Surplus    100,000  130,000  *90,000 

$445,000     $160,000     $260,000     $290,000 
(*What  would  you  do  if  this  were  a  deficit?)   Supplement- 
ary data:     The  stock  investment  account  on  K's  books  is 
carried  at  cost.    Each  subsidiary  considered  has  been  in  opera- 


I 


II 


Wv 


n 


hi! 


140         PROBLEMS    IN    ACCOUNTING 

tion  but  one  year,  with  the  exception  of  Z  company,  the  book 
value  of  the  total  stock  of  which  when  purchased  by  K  was 
$180,000.  Assume  Z  company  has  made  sales  to  X  company 
resulting  in  an  inter-company  profit  of  $10,000.  Solve  as  if 
the  investment  account  is  (a)  to  be  carried  at  cost  and  (b)  to 
be  carried  at  book  value.  How  would  the  solution  of  the  K 
and  Z  company  combination  be  altered  if  the  book  value  at 
acquisition  were  not  known? 

Problem  280 

From  the  information  provided  by  the  following  balance 
sheets  prepare  statements  giving  (a)  the  book  value  of  sub- 
sidiary stock  at  date  of  purchase,  assuming  purchase  to  have 
been  made  on  the  basis  of  the  subsidiary's  showing  as  of 
that  date ;  (b)  the  goodwill  purchased ;  (c)  the  interest  of  the 
minority ;  (d)  "consolidated  working  papers" ;  and  make  an 
analysis  of  the  consolidated  surplus. 

BALANCE  SHEET 

HOLDING  COMPANY 

Assets 

December  31,   1920 

Plant $300,000 

Inventories 50,000 

Investment  in  Subsidiary,  1,600  shares  of  $100 

par  value  all  bought  on  June  30  for 250,000 

Accounts  Receivable 100,000 

Cash 50,000 

Advances  to  Subsidiary 75,000 

$825,000 
Liabilities 

Capital  Stock   $400,000 

Notes  Payable   • 100,000 

Accounts  Payable  100,000 


PROBLEMS    IN    ACCOUNTING         141 

Surplus  January  1,  1920 $100,000 

Profits  for  year  1920 150,000 

$250,000 
Less  dividends  paid 25,000  225,000 


$825,000 

SUBSIDIARY  COMPANY 

BALANCE  SHEET 

December  31,  1920 

Assets 

Plant    $300,000 

Accounts  Receivable 50,000 

Inventories 100,000 

Cash 20,000 

$470,000 
Liabilities 

Capital  Stock  2,000  shares $200,000 

Notes  Payable   55,000 

Advances  from  Holding  Company 75,000 

Surplus  January  1,  1920 $80,000 

♦Profits  for  1920 60,000  140,000 


I   I' 

1         ! 


1        t 


$470,000 
♦Assume   that  the  year's  profit  has   accrued   month   by 
month. 

Problem  281 

From  the  following  three  trial  balances  prepare  a  con- 
solidated balance  sheet  as  at  December  31,  1912,  in  the  form 
you  would  draw  it  up  for  presentation  to  the  stockholders  of 
the  parent  company  (The  Safety  Razor  Company),  showing 
as  separate  items  therein  (a)  the  total  goodwill  of  the  com- 
bined companies;  and  (b)  the  net  profits  accruing  to  the  new 
corporation,  viz.,  to  the  Safety  Razor  Company. 


II 


if 


t 


142         PROBLEMS    IN    ACCOUNTING 

SAFETY  RAZOR  COMPANY 

TRIAL  BALANCE 

December  31,  1912 

Preferred  Stock $1,500,000 

Common  Stock  1,500,000 

Investments  in  Subsidiary  Compan- 
ies: 4,000  shares  of  stock  of  L.  W. 
Company  and  4,000  shares  of  stock 
of  Steel  Blade  Company,  both  of 
$100  each  at  cost $2,500,000 

Accounts  Payable  20,000 

Dividends  from  Subsidiary  Co.s 100,000 

Administration  Expense   25,000 

L.  W.  Co.  Current  Account 100,000 

Stel  Blade  Co.  Advances     150,000 

Cash    270,000 

Organization  Expenses  75,000 

$3,120,000         $3,120,000 

L.  W.  COMPANY 

TRIAL  BALANCE 

December  31,  1912 

Properties  and  Plant  $325,000 

Goodwill   250,000 

Investment  in  Steel  Blade  Co.,  2,000 
shares  of  a  par  value  of  $100  cost- 
ing $300,000 400,000 

Inventories    250,000 

Receivables  195,000 

Cash    90,000 

Capital  Stock  (4,000  shares) $400,000 

Accounts  Payable  125,000 

Steel  Blade  Company 175,000 


PROBLEMS    IN    ACCOUNTING         143 

Surplus   (includes  write-up  of  invest- 
ment)      710,000 

Safety  Razor  Co 100,000 


$1,510,000  $1,510,000 


STEEL  BLADE  COMPANY 

TRIAL  BALANCE 

December  31,  1912 

Goodwill    $  50,000 

Plant 325,000 

Inventories 190,000 

Receivables   105,000 

L.  W.  Company 195,000 

Cash    10,000 

Capital  Stock  (6,000  shares) 

Accounts  Payable   

Safety  Razor  Company 

Surplus  or  Deficit 


$600,000 

90,000 

150,000 

35,000 


i  t 


$875,000  $875,000 

In  the  preparation  of  your  consolidated  balance  sheet  be 
guided  by  the  following  assumptions : 

1.  That  the  Safety  Razor  Company  was  formed  on 
March  28,  1912,  and  acquired  its  stock  ownership  in  the  two 
subsidiary  companies,  as  shown  in  its  trial  balance,  on  April 
1,  1912. 

2.  That  at  Jan.  1, 1912,  the  L.  W.  Company  had  a  surplus 
of  $605,000.00,  and  the  Steel  Blade  Company  a  deficit  of  $50,- 
000.00. 

3.  That  no  inventory  was  taken  of  either  the  L.  W.  Com- 
pany or  the  Steel  Blade  Company  between  January  1  and 
December  31,  1912,  the  business  of  the  companies  being  con- 
tinued without  interruption  notwithstanding  the  change  in  the 
ownership  of  the  capital  stocks.     It  is  estimated  on  reliable 


I 


18? 


;      I 


I  r 


:  i' 


144         PROBLEMS     IN     ACCOUNTING 

authority  that  from  January  1  to  March  31,  1912  the  net  profits 
of  the  L.  W.  Company  were  $30,000  and  the  net  loss  of  the 
Steel  Blade  Company  for  the  same  period  was  $15,000. 

4.  That  prior  to  December  31,  1912  the  L.  W.  Company 
declared  a  dividend  of  $100,000  payable  to  the  parent  company 
which  was  duly  taken  up  on  the  books  of  both  companies, 
having  been  passed  through  the  current  accounts  and  charged 
against  the  surplus  of  the  L.  W.  Company  prior  to  December 
31,  1912. 

5.  That  the  difference  in  the  current  accounts  between 
the  Steel  Blade  Company  and  the  L.  W.  Company  represents 
$10,000  merchandise  in  transit  and  $10,000,  a  charge  for 
rental  of  warehouse  for  the  last  six  months  of  1912,  which  has 
been  credited  to  the  rent  account  on  the  books  of  the  Steel 
Blade  Company. 

Write  off  Yz  of  the  organization  expense  of  the  Safety 
Razor  Co. 

Problem  282 

1.  Following  are  the  trial  balances  of  Company  A  and  its 
subsidiaries  at  December  31,  1920: 

Debits  Co.  A  Co.  B.  Co.  C 

Cash    $      75,000  $  50,000  $  60,000 

Accounts  Receivable   350,000  190,000  420,000 

Notes  Receivable   200,000  60,000  40,000 

Inventory,  raw  material,  Jan.  1, 

1920    150,000  105,000  160,000 

Purchases,  raw  materials 650,000  400,000  510,000 

Labor    450,000  320,000  370,000 

Manufacturing  Expenses 190,000  190,000  205,000 

Selling  Expenses    85,000  40,000  75,000 

Administrative  Expenses 45,000  25,000  35,000 

Inventory,  goods  in  process, 

Jan.  1,  1920  80,000  70,000  75,000 

Inventory,  finished  goods,  Jan. 

1,  1920 90,000  65,000  80,000 


PROBLEMS     IN     ACCOUNTING         145 

Plant  and  Equipment 900,000      400,000       750,000 

Investment  in  Stock  of  Com- 
pany B    875,000       

Investment  in  Stock  of  Com- 
pany C 1,200,000       

$5,340,000  $1,915,000  $2,780,000 
Credits 

Capital  Stock $3,000,000  $  500,000  $  800,000 

Notes  Payable 110,000        80,000         60,000 

Accounts  Payable 100,000         65,000       250,000 

Bonds  Payable    500,000       

Premium  on  Bonds   5,000       

Reserve  for  Depreciation  100,000        60,000       112,500 

Sales   1,400,000    1,050,000    1,250,000 

Surplus    125,000       160,000       307,500 

$5,340,000  $1,915,000  $2,780,000 

The  inventories  at  December  31,  1920,  were: 

Co.  A         Co.  B  Co.  C 

Raw  Material    $280,000     $175,000  $210,000 

Goods  in  Process  95,000         80,000  85,000 

Finished  Goods 135,000       145,000  105,000 

Company  A  purchased  the  entire  stock  issues  of  Com- 
panies B  and  C  at  January  1,  1920,  at  the  price  shown  in  the 
trial  balance.  During  the  year  each  of  the  three  companies 
declared  and  paid  a  5  per  cent,  dividend.  Company  A  took 
up  its  dividends  from  Companies  B  and  C  by  credits  to  surplus. 
The  various  entries  for  the  dividends  were  the  only  entries 
affecting  the  surplus  accounts  during  the  year. 

At  December  31,  1919,  Company  A's  inventory  of  raw  ma- 
terial included  goods  purchased  from  Company  B  at  a  price 
of  $60,000,  the  cost  thereof  to  Company  B  being  $40,000. 

At  the  same  date  Company  B's  inventory  of  raw  material 
included  goods  purchased  from  Company  C  for  $75,000,  on 
which  Company  C  made  a  profit  of  $25,000. 


146 


PROBLEMS     IN    ACCOUNTING 


(If 


Finished 
Goods 
$4,000 
5,000 


During  1920,  Company  C  sold  goods  to  Company  B  at  a 
price  of  $200,000.  These  goods  cost  Company  C  $160,000. 
Company  B  still  owes  $30,000  on  these  purchases,  the  in- 
debtedness being  included  in  the  accounts  payable. 

During  1920,  Company  B  sold  goods  to  Company  A  at  a 
cost  of  $300,000  and  at  a  selling  price  of  $375,000.  Company 
A  made  cash  advances  totaling  $400,000  to  Company  B  during 
the  year.  The  sales  just  mentioned  were  charged  against  the 
advances  account,  the  $25,000  balance  of  which  is  included  in 
Company  B's  account  payable. 

The  inventories  at  December  31,  1920,  include  intercom- 
pany profits  as  follows : 

Raw        Goods  in 
Material      Process 

Company  A $20,000        $5,000 

Company  B 30,000  6,000 

Company  A*s  bonds  were  issued  July  1,  1920.  They  bear 
5  per  cent,  interest,  payable  semi-annually  and  mature  in  five 
years.    No  interest  has  been  paid. 

Allow  depreciation  at  5  per  cent,  per  annum  on  the  cost 
of  the  fixed  assets. 

Prepare  the  following  consolidated  statements : 
Cost  of  goods  manufactured  and  sold. 
Profit  and  loss  statement. 

Surplus  statement  (showing  as  the  final  balance  there- 
in the  surplus  balance  appearing  in  the  consolidated 
balance  sheet). 

Balance  Sheet 
Problem  283 

On  January  1,  1913,  the  A  B  Company  purchased  90% 
of  the  stock  of  the  X  Y.  Company  and  80%  of  that  of  the 
P  Q  Company,  two  subsidiary  companies  which  it  thus  con- 
trolled, and  in  fact  actually  directed  the  policy  and  general 
administration,  the  minority  holdings  in  each  case  being  in  the 
hands  of  the  ofificers  and  employees  of  the  subsidiary  com- 
pany or  of  other  interests  friendly  to  the  A  B  Company.    On 


fcj^ 


PROBLEMS     IN    ACCOUNTING 


147 


June  30,  1913,  the  holdings  of  the  X  Y  Company  were  reduced 
to  80%  by  the  sale  of  100  shares  of  $200.00  per  share  to  cer- 
tain employes  not  heretofore  stockholders;  while  in  the  case 
of  the  P  Q  Company,  owing  to  the  resignation  of  an  officer, 
his  holdings,  consisting  of  100  shares,  were  purchased  at  par, 
the  holdings  by  the  A  B  Company  being  thus  increased  to 
90%,  so  that  on  December  31,  1913,  the  proportion  of  holdings 
in  the  two  companies  was  exactly  reversed. 

The  following  are  the  trial  balances  of  all  three  companies 
(after  closing)  at  December  31,  1913 : 


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PROBLEMS    IN    ACCOUNTING 


SECTION  VIII.     Accounting  for  Holding  Companies  and 
Mergers. 

(b)  A  merger  usually  carries  with  it  the  voluntary  action 
of  corporations  made  toward  combining  their  interests  under 
one  operating  name.  Expert  talent  is  expended  on  arriving 
at  an  equitable  valuation  of  the  net  assets  of  the  merging 
companies,  and  the  amalgamation  stock  is  issued  to  the  sev- 
eral interests  in  accord  with  that  valuation.  Sometimes  the 
stock  is  issued  direct  to  the  individual  companies,  each  one 
of  which  distributes  the  new  stock  in  return  for  the  old  as 
the  final  act  of  dissolution;  or  the  new  stock  is  exchanged 
for  the  holdings  of  the  stockholders,  dealt  with  as  individuals. 
An  entirely  new  company  may  be  organized  to  take  over  the 
assets  and  liabilities  of  the  old,  or  one  of  the  old  companies 
may  issue  newly  authorized  stock  (simple  expansion)  with 
or  without  a  kind  of  accompanying  process  of  reorganization. 
Where  a  stock  allowance  greater  or  less  than  the  book  value 
of  the  net  assets  is  made  in  taking  over  a  company  through 
a  merging  of  interests,  it  becomes  necessary  to  recognize 
goodwill  or  a  reduction  of  surplus,  as  the  case  may  be.  An 
interesting  problem  is  presented  by  the  merging  of  companies 
one  of  which  is  an  investor  in  another. 
Problem  284 

Assume  that  the  Roman  Cut  Stone  Company  and  the 
Arawanna  Quarry  Company  agree  to  amalgamate  under  the 
name  of  the  Arawanna  Quarry  Company.  This  latter  com- 
pany is  to  reorganize  and  to  secure  a  new  authorization  from 
its  state  to  issue  sufficient  stock  to  cover  the  merger.  The 
following  are  the  balance  sheets  of  the  two  companies  just 
prior  to  the  proposed  merger : 

Roman  Cut  Stone  Co. 
Balance  Sheet  January  31,  1920 
Assets  Liabilities 

Property   $100,000     Capital  Stock $150,000 

Miscellaneous  Assets.     80,000    Surplus 30,000 


$180,000 


$180,000 


PROBLEMS    IN    ACCOUNTING 


151 


Arawanna  Quarry  Company 
Balance  Sheet 
January  31,  1920 
Assets  Liabilities 

Property $250,000     Capital   Stock    $300,000 

Investment    in    Ara-  Acc'ts  Payable 50,000 

wanna     Co.,     1,000  Surplus 100,000 

Shares,    Par    Value 

$100 100,000 

Miscellaneous   Assets  100,000 


$450,000 


$450,000 


The  reorganized  company  is  to  give  one  and  one-half 
shares  of  new  stock  for  one  of  the  old.  (Note  that  after  ac- 
quiring the  old  stock  of  the  Arawanna  Quarry  Co.  the  amal- 
gamation is  a  stockholder  in  the  Roman  Cut  Stone  Co.,  and 
need  not  distribute  shares  to  itself.)  Set  up  a  series  of  bal- 
ance sheets  reflecting  the  progress  of  the  merger,  assuming 
in  one  case  that  the  amalgamation  issues  the  new  stock  di- 
rectly to  the  old  holders,  and  in  the  other  that  it  deals  directly 
with  the  merging  companies.  Also  assume,  in  both  these 
cases,  that  the  amalgamation  makes  a  stock  allowance  for 
the  Roman  holdings  among  the  Arawanna  Company's  assets, 
according  to  one  plan,  and  does  not,  according  to  another. 

Problem  285 

Make  the  accounting  entries,  and  show  the  balance  sheet 
resulting,  for  the  amalgamation  of  the  following  two  com- 
panies : 

Blue  Bell  Mining  Company 
Assets  Liabilities 

Mine  and  Plant $525,000    Accounts  Payable.... $  20,000 

Accounts  Rec 20,000     Capital  400,000 

K.  D.  Corporation . . .     10,000     Surplus 140,000 

Cash 5,000 


$560,000 


$560,000 


■■f 


I 


152         PROBLEMS    IN    ACCOUNTING 

K.  D.  Corporation 


Assets 

Mine  and  Plant   $600,000 

Accounts  Rec 30,000 

Cash 10,000 

Bullion  in  transit 50,000 


Liabilities 

Accounts  Payable $  30,000 

Blue  Bell  Mining  Co.     10,000 

Capital    500,000 

Surplus 150,000 


$690,000  $690,000 

Note:    Assume  that  neither  company  is  to  have  control 
in  the  merged  organization. 

Problem  286 

Three  manufacturers,  each  having  an  independent  busi- 
ness and  wishing  to  effect  a  consolidation  of  their  respective 
interests,  organize  the  United  States  Manufacturing  Com- 
pany, a  corporation  with  an  authorized  capital  stock  of  $1,500,- 
000,  half  common  and  half  preferred.  They  sell  to  the  new 
corporation  all  of  their  real  estate,  buildings,  machinery,  tools, 
fixtures,  merchandise  and  supplies,  in  consideration  of  $1,500,- 
000,  and  agree  to  accept  in  payment  $750,000  preferred  and 
$750,000  common  stock  of  the  new  corporation.  The  three 
vendors  then  donate  to  the  treasury  of  the  corporation  $150,- 
000  of  preferred  and  $150,000  of  common  stock  to  provide  for 
working  capital.  The  company  sells  $100,000  of  its  preferred 
stock  in  the  treasury  for  80%  cash,  giving  a  bonus  to  the 
purchaser  of  20%  in  common  stock. 

For  the  purpose  of  raising  additional  funds  for  improve- 
ments and  additions  to  plant,  the  corporation  mortgages  its 
real  estate  and  buildings  as  security  for  an  issue  of  bonds 
amounting  to  $250,000.  These  bonds  the  company  sells  to 
bankers  at  90%,  giving  as  a  bonus  10%  of  preferred  stock  and 
20%  of  common  stock. 

Draft  entries  to  express  correctly  the  above  transactions 
on  the  books  of  the  corporation,  and  prepare  a  statement  of 
assets  and  liabilities  of  the  company. 


Pi! 


PROBLEMS    IN    ACCOUNTING 


153 


Problem  287 

A  promoter  secures  options  upon  the  plants  of  three  com- 
peting companies,  A,  B  and  C.  He  proposes  to  organize  the 
Doe  Co.  with  an  authorized  capital  of  $700,000,  of  which 
$300,000  is  common  and  $400,000  is  preferred  stock,  each 
having  a  par  value  of  $100  a  share.  His  plan  includes  $150,- 
000  of  4%  first  mortgage  bonds  convertible  at  the  holder's 
option  into  preferred  stock  at  105  or  redeemable  at  the  com- 
pany's option  at  110  plus  accrued  interest.  The  companies 
A,  B  and  C  have  the  following  status  respectively,  including 
cash: 


Assets 

Liabilities 

Surplus 

Deficit 

Capital 

A 

$171,000 

$56,000 

$15,000 

$100,000 

B 

165,000 

80,000 

$5,000 

90,000 

C 

108,000 

47,000 

6,000 

55,000 

The  promoter's  options  provide  that  these  companies  are 
to  sell  their  properties  on  the  basis  of  $125,000  to  A,  $100,000 
to  B,  and  $75,000  to  C,  payable  ^  in  cash,  J/2  in  preferred 
stock  and  ^  in  bonds  of  any  company  that  may  be  formed 
to  take  over  these  properties.  It  is  also  agreed  that  if  the 
promoter  elects  to  exercise  his  options  and  acquire  the  prop- 
erties covered,  the  liabilities  of  each  company  are  to  be  as- 
sumed by  the  purchasing  company. 

M,  N  and  O  incorporate  the  Doe  Co.  as  outlined  above, 
each  subscribing  for  10  shares  of  common  stock,  paying  50% 
in  cash  so  as  to  qualify  as  incorporators  and  directors.  At 
the  first  director's  meeting  the  bonds  are  authorized  and  the 
Doe  Co.  through  its  directors  agrees  with  the  promoter  to 
take  over  his  options,  issuing  in  payment  thereof  to  him 
$250,000  in  common  stock  of  the  company.  It  is  also  agreed 
in  consideration  of  such  stock  that  the  promoter  is  to  fur- 
nish $100,000  in  cash.  To  provide  additional  working  capital 
and  to  assist  in  its  financing  the  promoter  donates  to  the  com- 
pany $75,000  in  common  stock.  The  Doe  Co.  takes  over  the 
property  and  liabilities  of  the  other  corporations.     $100,000 


,' 


r  IT  ■ 

;  t 


154         PROBLEMS    IN    ACCOUNTING 

of  the  preferred  stock  is  underwritten  by  bankers  at  110  in 
cash  with  a  bonus  of  one  share  of  common  with  every  four 
shares  of  preferred.  To  be  able  to  fund  a  part  of  its  assumed 
liabilities  the  Doe  Co.  sells  the  balance  of  its  bonds  at  90, 
giving  a  bonus  to  the  purchaser  of  20%  in  common  stock,  and 
applies  the  proceeds  to  pay  off  the  liabilities  assumed.  As 
the  result  of  various  bargains  other  creditors  agree  to  take 
$75,000  of  the  common  stock  available  for  issue  and  sale  at 
an  average  price  considering  the  various  stock  bonuses  given 
of  80.  All  common  stock  has  been  issued.  $50,000  of  the 
bonds  are  converted  after  issuance  into  preferred  stock  at 
105,  the  holder  paying  the  premium  in  cash  to  the  company. 
The  directors  then  exercise  their  option  and  retire  and  cancel 
$35,000  of  the  company's  bonds  at  110  paying  the  premium 
in  cash,  balance  in  preferred  stock.   (Neglect  accrued  interest.) 

Draft  Journal  entries  to  give  effect  to  the  above  facts 
upon  the  books  of  the  Doe  Co.  and  present  a  properly  drawn 
Balance  sheet  showing  the  position  of  the  company,  after  these 
entries  have  been  posted. 

SECTION  IX.     Miscellaneous  Problems. 

Under  this  head  will  be  considered  cases  requiring  com- 
parative statements  and  "funds  provided"  statements,  cases 
involving  installment  and  consignment  sales,  joint  ventures, 
accounting  for  estates,  agency  and  branch  accounts,  long- 
time contracts,  etc. 

Problem  288 

General  Balance  Sheet,  X.  Y.  Z.  Co.,  December  31 

Assets 

1911  1910 

Plant,  machinery,  patents,  goodwill,  etc.$  6,978,288  $6,922,185 

Securities  owned 1,121,670  1,121,670 

Treasury  securities 237,000  237,000 

Cash 92,385  241,966 

Accts.  and  Bills  Rec 1,143,211  1,116,893 


PROBLEMS    IN    ACCOUNTING         155 

Sinking  fund  assets 183,906         200,787 

Inventories  1,405,138       1,109,835 

$11,160,598  $10,950,336 

Liabilities 

Capital  stock   $  6,485,800  $6,485,800 

Bonded  debt    2,000,000  2,100,000 

Interest  on  bonds 122,213  122,388 

Accounts  and  bills  payable 196,740  119,717 

Reserve  for  taxes,  etc 9,002  12,495 

Sinking  fund   682,906  600,787 

Surplus    1,663,937  1,509,149 


$11,160,598  $10,950,336 

(a)  What  is  the  origin  of  the  sinking  fund  of  $682,906 
appearing  on  the  liability  side? 

(b)  How  has  the  sinking  fund  been  invested? 

(c)  In  1911  the  corporation  paid  a  dividend  of  4:%.  What 
were  the  profits  for  the  year? 

(d)  What,  in  general,  is  the  utility  of  the  "comparative" 
balance  sheet,  and  why  would  it  be  desirable  to  show  the 
percentages  of  increase  and  decrease  of  the  several  items? 

(e)  Can  you  see  any  reason  why  the  executive  would 
want  to  know  the  relation  to  the  total  which  each  item  bears? 

Problem  289 

Assets 

1912  1913 

Real  Estate  and  Plant $  60,000        $  57,000 

Machinery 10,000  9,000 

Merchandise  39,321  44,771 

Accounts  Receivable  30,219  26,109 

Loans  to  Directors  10,000  15,000 

Cash 10,600  7,260 

Total $160,140        $159,140 


4 


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156         PROBLEMS    IN    ACC0U:NTING 

Liabilities 

Capital   Stock    $100,000  $100,000 

Notes  Payable 20,000  22,000 

Accounts  Payable 30,140  27,140 

Surplus 10,000  10,000 

Total $160,140        $159,140 

Assume  that  you  are  the  Cashier  of  a  local  bank  and  a 
request  is  made  by  the  corporation  whose  balance  sheets  are 
shown  above  for  a  loan  of  $20,000.  State  whether  or  not  you 
would  grant  the  accommodation  and  give  your  reasons  fully. 

Problem  290 

Dartmouth  Manufacturing  Corporation 
General  Balance  Sheet,  October  1 

Assets 

1907  1908  1909 

Real  Estate   $   458,709    $   473,553    $   466,614 

Machinery 616,675  644,468  726,397 

New  Construction   644,184 

Merchandise 393,570  634,735  669,953 

Cash  &  Debts  Receivable. . .      653,681  648,013  706,227 

Totals    $2,122,635    $2,300,769     $3,213,375 

Liabilities 

1907  1908  1909 

Common  Stock  $   600,000    $   600,000  $1,200,000 

Preferred  Stock 337,820 

Funded  Debt 450,000  450,000  800,000 

Bills  Payable 150,000 

Accounts  Payable 20,529  24,505  61,940 

Reserve  for  Bonds 150,000  175,000  200,000 

Reserve  for  Depreciation .. .      100,000  175,000  175,000 

Profit  and  Loss 802,106  876,264  288,615 

Totals   $2,122,635    $2,300,769    $3,213,375 


PROBLEMS    IN    ACCOUNTING         157 

(a)  What  were  the  profits  for  the  year  ending  Oct.  1, 
1909,  assuming  that  no  cash  dividends  have  been  paid  and 
that  the  increase  in  common  stock  outstanding  represents  a 
stock  dividend. 

(b)  Where  did  they  get  the  money  to  make  the  exten- 
sions added  in  1908-09?  Why  didn't  they  use  the  surplus  to 
make  these  extensions? 

Problem  291 

Below  is  shown  the  liability  side  of  a  corporate  balance 
sheet  for  the  year  ending  Dec.  31,  1912.  There  are  also  shown 
various  assumed  balance  sheets  for  the  year  ending  Dec.  31, 
1913.  Give  the  history  of  the  business  during  the  year  1913 
as  shown  by  the  assumed  balance  sheets  (a)  to  (g). 

Dec.  31,  Liabilities  Dec.  31, 1913 

1912  (a)  (b)  (c) 

Capital  Stock... $   800,000    $   800,000  $1,200,000  $    800,000 

Bonds 500,000  750,000  500,000  500,000 

Bills  Payable   .  .      960,000  840,000  600,000  740,000 
Accounts    Paya- 
ble        320,000  160,000  300,000  280,000 

Surplus 30,000  60,000  10,000  70,000 

Total    $2,610,000     $2,610,000     $2,610,000     $2,390,000 

Liabilities  1913 

(d)  (e)  (f)  (g) 

Capital    Stock.. $1,000,000  $1,000,000  $1,200,000  $1,000,000 

Bonds    600,000  750,000  300,000  400,000 

Bills  Payable  . .      960,000  800,000  600,000  760,000 

Accounts  Payable   320,000  320,000  400,000  270,000 

Surplus    30,000  80,000 

Total    $2,910,000     $2,950,000     $2,500,000     $2,430,000 

*A  deficit  of  $20,000  appears  on  the  asset  side  of  the  balance 
sheet. 


«r 


158 


PROBLEMS    IN    ACCOUNTING 


Problem  292 

For  the  years  ending  December  31,  1913  and  1914,  the  bal- 
ance sheets  of  The  Acme  Specialty  Company  are  as  follows: 
Assets  1913  1914 

Real  Estate  and  Plant $300,000.00        $280,000.00 

Machinery  and  Tools   100,000.00  90,000.00 

Raw  Materials  and  Goods  in  Process     46,313.00  37,642.00 

Finished  Products   53,687.00  62,358.00 

Bills  and  Accounts  Receivable....     71,600.00  60,084.00 

Sinking  Fund    28,400.00  33,916.00 

Depresiation    Fund 30,000.00 

Cash    5,049.66  14,128.87 

Totals    $605,049.66        $608,128.87 

Liabilities 

Common  Stock  $200,000.00  $200,000.00 

6%  Preferred  Stock   100,000.00  100,000.00 

6%  Bonds,  1st  Mortgage 100,000.00  100,000.00 

Bills  and  Accts.  Payable 84,011.44  78,128.72 

Accrued   Liabilities    3,099.56  6,084.28 

Sinking  Fund    28,400.00  33,916.00 

Reserve  for  Bad  Debts 4,499.00  3,999.87 

Reserve  for  Depreciation 25,000.00  25,000.00 

Surplus    60,039.66  61,000.00 

Totals    $605,049.66        $608,128.87 

No  machinery  or  real  estate  has  been  sold  during  the  year. 

At  the  end  of  1914  the  company  paid  a  dividend  of  6%  on 

the  Preferred  Stock  and  3%  on  the  Common.    What  were  the 

total  profits  for  the  year?     How  was  depreciation  provided 

for? 


PROBLEMS    IN    ACCOUNTING 


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160         PROBLEMS     IN     ACCOUNTING 

In  1907  there  was  written  off  against  surplus  for  reduc- 
tion in  value  of  pine  lands  and  stumpage  $703,497.  For  reduc- 
tion in  patents,  rights,  trade  marks,  etc,  $917,371. 

(a)  On  the  basis  of  the  figures  presented  above  explain 
the  changes  in  surplus  for  each  year. 

(b)  What  was  the  surplus  appearing  on  the  balance 
sheet  for  Dec.  31,  1906? 

(c)  Give  a  history  of  the  business  for  the  years  1907  to 
1911,  as  shown  by  the  figures  presented. 

Problem  294 

Prepare  a  statement  of  resources  and  their  application  for 
the  12  months  ended  December  31,  1930,  using  the  following 
data: 

THE   HALL   MANUFACTURING   COMPANY- 
BALANCE-SHEET 
Assets 

Dec.  31,  1919  Dec.  31,  1920 

Cash    $    6,000  $    1,800 

Accounts   receivable    30,000  32,000 

Raw   material    12,000  14,500 

Goods  in  process   16,000  17,500 

Finished   goods    21,000  19,000 

Land    "^0,000  100,000 

Buildings    115,000  170,000 

Machinery    90,000  100,000 

Tools    26,000  23,000 

Patents    30,000  28,000 

Discount  on  bonds   2,000 

Investment   in    stocks    25,000 

Advances  to  salesmen    500  1,000 

Unexpired  insurance  300  250 

$440,800  $509,050 


/ 


PROBLEMS     IN     ACCOUNTING         161 

Liabilities 

Accounts  payable $  35,000  $  10,000 

Notes  payable   25,000  5,000 

Bank   loans    20,000 

Bonds   payable    200,000  300,000 

Reserve  for  depreciation,  build- 
ings  and   machinery 20,000  29,000 

Reserve  for  bad  debts 1,200  1,500 

Reserve  for  construction 16,000  20,000 

Capital  stock   100,000  100,000 

Surplus    23,600  43,550 

$440,800  $509,050 

Following  is  an  abstract  of  the  surplus  account : 

Balance  January  1,  1920  $23,600 

Add  net  profit  for  1920  8,950 

Add  appraisal  increase  in  land 30,000 

Total    $62,500 

Deduct  credit  to  reserve  for  construction..  $  4,000 

Deduct  dividends  paid  December  31,  1920.  .     15,000       19,000 

Balance,  December  31,  1920   $43,550 

Depreciation  was  provided  during  the  year  as  follows : 

Credited    to    reserve    for    depreciation,    buildings    and 

machinery    $10,000 

Written  off  from  tools 5,000 

Written  off  from  patents 2,000 

During  the  year  machinery  which  cost  $7,000  was  sold  for 
$6,000.    The  loss  was  absorbed  in  the  reserve  for  depreciation. 

Problem  295 

(a)     Assuming  figures,  draw  up  a  comparative  profit  and 
loss  statement,  showing  percentages  of  increase  and  decrease 


m 


162         PROBLEMS     IN    ACCOUNTING 

of  the  various  items.  Write  a  brief  discussion  of  what  the 
statement  means  to  you,  and  of  what  the  business  executive 
could  get  out  of  it. 

(b)  Explain  and  illustrate  a  ''cumulative  revenue  state- 
ment." 

Problem  288 

From  the  following  comparative  balance  sheets  of  the  ABC 
Company  at  December  31,  lUlT,  and  December  31,  1918,  prepare 
a  short  statement  showing  funds  realized  during  the  year  and 
the  disposition  made  thereof : 

Assets  Dec.  31, 1917  Dec.  31, 1918 

Capital  Assets  -, $    600,000        $    900,000 

(Replacement  values,  as  shown  by  ap- 
praisal, were  used  at  December,  31, 
1918.) 

Inventories 1,000,000  1,160,000 

Accounts  Receivable 850,000  800,000 

Cash 200,000  550,000 

Deferred  Charges 20,000  10,000 

$2,670,000        $3,420,000 
Liabilities : 

Capital  Stock  $1,000,000        $1,000,000 

Bonds  (Issued  at  Par) 500,000 

Capital  Surplus,  representing  excess  of 
sound  replacement  value  of  appraisal 
at  December  31,  1918,  over  the  book 
value  of  capital  assets  at  that  date.. . .  150,000 

Bank  Loans  750,000  400,000 

Reserve  for  Depreciation  and  Replace- 
ment (the  Reserve  at  Dec.  31,  1918, 
represents  the  difference  between  the 
replacement  and  sound  value  of   the 

appraisal  at  Dec.  31,  1918) 100,000  200,000 

Surplus 320,000  570,000 

$2,670,000         $3,420,000 


PROBLEMS     IN    ACCOUNTING 


163 


Problem  297 


Assuming  transactions,  show  by  journal  entries  and  accounts 
how  you  would  deal  with  (a)  sales  on  the  installment  plan  and  (b) 
sales  on  consignment.  In  regard  to  (a)  the  student  should  note 
that  the  Income  Tax  Unit  permits  either  of  two  bases  of  account- 
ing for  income  from  installment  sales,  namely,  on  the  basis  of  the 
expected  profit  from  the  entire  sale,  and  on  the  basis  of  actual 
installments  when  paid. 

Problem  298 

Explain  how  you  would  go  about  providing  for  losses  through 
bad  debts.  What,  in  your  opinion,  is  the  proper  place  for  the  bad 
debts  charge  in  the  income  statement?  Give  full  statement  of  your 
reasons. 

Probleni  299 

Give  a  complete  discussion  of  the  different  theories  concern- 
ing accounting  for  cash  discounts  on  purchases  and  on  sales. 

Problem  300 

On  January  25th  R.  Rollins  and  K.  Karr  joined  together, 
equally,  in  an  investment  of  merchandise  amounting  to  $5,000. 
Ten  days  later  both  buy  for  joint  accounts  additional  merchandise 
costing  $10,000.  The  day  following  Rollins  contributed  $2,000 
in  merchandise  to  the  venture,  and  Karr  $1,500  in  merchandise, 
which  both  took  from  the  shelves  of  their  individual  stores,  Karr 
paying  $500  in  cash  to  Rollins  to  even  up  the  account.  On  March 
1st  Rollins  sells  on  joint  account  merchandise  bringing  him  $8,000 
in  cash.  On  the  same  date  each  drew  $1,000  worth  of  merchan- 
disse.  On  March  15th  Rollins  sells  Ray  &  Ruff,  wholesale  mer- 
chants, property  from  his  own  business,  asking  in  return  an  equiv- 
alent in  their  goods  amounting  to  $6,000,  which  he  treated  as 
bought  jointly  for  himself  and  Karr.  Rollins  makes  a  sale  on  the 
same  date  amounting  to  $5,000.  He  is  allowed  3%  commission 
on  all  of  his  sales.    On  April  1st  the  partners  agree  to  close  their 


164 


PROBLEMS     IN     ACCOUNTING 


m 


speculation  and  joint  account,  and  each  take  over  one-half  the 
remaining  unsold  merchandise,  which  was  valued  at  $12,000. 

Exhibit  the  journal  entries  on  RolHns'  books,  and  ledger 
accounts  with  the  joint  venture  and  with  Karr. 

Where  there  are  three  or  more  partners  concerned  in  a  ven- 
ture of  this  kind,  how  would  settlement  between  them  be  effected 
at  the  close  of  the  venture?  Assume  a  simple  case  involving  three 
partners,  and  exhibit  the  accounts  at  the  end,  explaining  the  pro- 
cedure of  settlement. 

Problem  301 

(a)  How  would  you  show  in  the  accounts  of  the  consigner 
goods  which  have  been  shipped  and  reported  damaged  and  unsal- 
able by  the  consignee?    In  the  accounts  of  the  consignee? 

(b)  Assume  transactions  covering  the  typical  consignment, 
and  exhibit  the  accounts  of  both  consignor  and  consignee  during 
the  progress  of  the  deal,  explaining  how  the  situation  should  be 
made  to  appear  on  the  two  balance  sheets. 

Problem  302 

(a)  Distinguish  between  an  agency  and  a  branch.  In  gen- 
eral what  is  the  plan  of  accounting  for  agency  and  for  branch 
transactions  ? 

(b)  If  a  complete  statement  of  condition  of  the  affairs  of 
the  "home  office"  were  required,  how  would  you  set  about  pro- 
viding it? 

Problem  303 

Compile  from  the  following  particulars,  supplied  by  the 
branches,  an  account  with  each  branch  in  the  books  at  the  head 
office  of  the  Wholesale  Company,  whose  year  ends  December  31, 
1909,  bringing  down  the  balances  as  they  should  appear  on  Janu- 
ary 1,  1910.  Also  prepare  a  statement  showing  the  profit  of  each 
branch. 

The  branches  receive  all  their  goods  from  the  head  office  and 
pay  in  all  their  cash  every  day.    They  keep  their  own  sales  ledgers 


PROBLEMS     IN     ACCOUNTING 


165 


and  do  their  own  collecting.  All  payments  for  wages  and  expenses 
at  the  branches  are  drawn  by  check  from  the  head  office  on  the 
Imprest  system. 

A  B 

Merchandise  received  from  the  Head  Office. $10,360  $10,730 

Cash  received  from  customers 11,450  10,340 

Allowances  to  customers 15  35 

Returns  from  customers 75  200 

One  year's  charge  sales  to  Dec.  31,  1909 10,870  12,605 

Cash  Sales 8,400  5,700 

Bad  Debts  280  530 

Inv.  of  Mdse.  at  Jan.  1,  1909 2,300  2,500 

Debtors  at  Jan.  1,  1909 8,270  5,730 

Debtors  at  Dec.  31,  1909 7,320  7,230 

Inv.  at  Dec.  31,  1909 3,750  4,320 

Rent  and  Taxes  paid 600  *       730 

Wages  and  other  expenses 2,020  2,310 

Problem  304 

A  company  with  head  office  in  Chicago  and  factory  at  South 
Bend,  Indiana,  conducts  three  selling  branches  in  New  York, 
San  Francisco,  and  Montreal,  which  are  supplied  with  goods 
from  the  factory,  the  invoices  being  sent  out  from  the  head  office. 
The  branches  keep  their  own  sales  ledgers,  send  out  monthly 
statements  to  customers  and  receive  cash  against  their  ledger  ac- 
counts, which  they  remit  weekly  to  Chicago. 

All  branch  expenses,  including  salaries  and  wages,  are  paid  by 
the  branches  from  petty  cash  accounts,  kept  at  a  fixed  balance  of 
$500,  by  draft  on  the  head  office. 

The  following  information  is  supplied  by  the  branches  at 
December  31,  1913,  summarizing  the  transactions  of  the  previous 
six  months : 

San 
New  York    Francisco    Montreal 

Rents  and  taxes  paid $     200        $     175        $       75 

Sales  for  6  mos.  to  Dec.  31, 1913 . .  12,500  11,800  10,225 


'4i 


166  PROBLEMS     IN     ACCOUNTING 

Salaries  and  wages 1,650  1,520  1,600 

Returned  sales   200  100  250 

Allowances  to  customers 50  40  40 

Bad  debts   125  60 

Cash  sales 6,250  5,380  6,100 

Cash  received  from  customers  on 

ledger  accounts    10,850  10,260  9,150 

Debtors  July  1,  1913 5,820  6,140  7,240 

Debtors  December  31,  1913 7,220  7,415  7,975 

Petty  cash  on  hand  July  1,  1913 . .  500  500  500 

Petty  cash  on  hand  Dec.  31,  1913.  500  500  500 

Stock  July  1,1913 3,450  3,820  3,650 

Stock  December  31,  1913 4,300  4,720  4,500 

Goods  received  from  Head  Office 

factory    11,500  10,240  10,350 

From  these  details  prepare  branch  accounts  as  they  should  appear 
in  the  head  office  books  and  draw  up  a  final  general  trial  bal- 
ance with  branch  profit  and  loss   accounts. 

Problem  305 

A  New  York  corporation  builds  a  plant  and  establishes  a 
branch  in  Liverpool,  England.  At  the  expiration  of  its  fiscal 
period  a  trial  balance  is  forwarded  to  the  New  York  office  as  fol- 
lows: 

Plant £250,000 

Accounts  rec 187,500 

Expenses 25,000 

Inventory  (end  of  fiscal  period) 50,000 

Remittance  account  150,000 

Cash   12,500 

Accounts  payable    87,500 

Income  from  sales 250,000 

New  York  Office 337,500 

i675,000  i675,000 


PROBLEMS     IN     ACCOUNTING         167 

A  trial  balance  of  the  New  York  books  at  the  same  date  was 
as  follows : 

Capital  stock $2,500,000.00 

Patents   $1,500,000.00 

London  account  1,640,250.00 

Remittance  account 729,281.25 

Expenses  at  New  York 25,000.00 

Cash    64,031.25 

$3,229,281.25  $3,229,281.25 

The  remittance  account  is  composed  of  four  sixty  day  drafts 
on  Liverpool  for  £37,500  each,  which  were  sold  in  New  York  at 
$4,855,  $4.86,  $4,865,  and  $4.8675  respectively. 

Prepare  a  balance  sheet  of  the  New  York  books  after  closing 
and  a  statement  of  assets  and  liabilities  of  the  Liverpool  branch 
reconciled  with  the  New  York  books.  Close  the  books  at  rate  of 
exchange  on  last  day  of  the  fiscal  year  of  $4,875.  Conversion  of 
the  remittances  are  to  be  made  at  the  average  rate  of  the  four 
bills. 

Problem  306 

A  in  London  in  current  account  with  B  of  New  York,  engages 
an  accountant  to  prepare  a  statement  to  be  mailed  to  B,  from  the 
following  data : 

DEBITS 
1914 

May  12 £  750 

May  30   117 

June  12  340 

July  1 150 

Total  debits  ^1,357 


m 


168         PROBLEMS     IN    ACCOUNTING 

CREDITS 
1914 

June  10  £    500 

June  30  300 

Total  credits £  800 

Balance £  557 

Find  the  average  due  date  of  the  account  and  the  interest  at 
5%  to  July  1,  365  days  to  the  year. 

Problem  307 

A  firm,  having  several  branches,  maintains  an  account  with 
each  branch  in  the  ledger  and  charges  all  such  accounts  with  goods 
sent  the  agents  for  stock.  When  the  inventory  of  stock  is  taken, 
the  balance  of  each  branch  account  is  treated  as  an  ordinary  Ac- 
counts Receivable  and  is  included  in  the  general  debts  owing  to 
the  firm.  If  you  see  any  objection  to  this  method  say  how  you 
would  deal  with  the  accounts. 

Problem  308 

On  what  two  bases  are  contract  jobs  entered  into?  Discuss 
the  theory  of  taking  profit  on  contract  jobs  extending  over  one 
accounting  period.  (Note  the  ruling  of  the  Income  Tax  Unit 
concerning  income  to  be  taken  by  contractors.) 

Problem  309 

The  assets  of  Richard  Duke,  deceased,  were  appraised  by  the 
Probate  Court  as  follows: 

Appraised        Disposition  under  the 
Value  will 

House    $  2,000.00     To  his  brother  Gustave. 


Bond  holdings*   6%,  pay- 
able June  30  and  Dec.  31  112,551.39 


To  his  widow  for  life, 
and  then  to  his  two 
sons,  Harold  and 
Peter,  equally. 


PROBLEMS     IN    ACCOUNTING         169 

Real  Estate 

Lot  No.  1 10,000.00  Cash  to  his  sons  $5,000 

Lot  No.  2 8,000.00  each,  and  the  remain- 
Business  block 30,000.00  der  of  the  estate  to  the 

Household  goods 2,000.00  widow. 

Cash 2,000.00 

*These  bonds  ($100,000)  bought  to  yield  6%  on  December 
31,  1920.  The  death  of  the  deceased  took  place  on  March  31, 
1921. 

Debts  amounting  to  $400,  funeral  expenses  of  $450,  and  the 
legal  and  probate  expenses  of  $900  were  all  paid  in  cash.  In 
April,  1921,  Lot  No.  1  was  sold  for  $12,000,  and  by  the  consent 
of  all  the  parties  Harold  took  Lot  No.  2  in  discharge  of  the 
bequest  to  him,  and  paid  the  estate  $4,000  in  cash. 

The  widow  died  on  July  31,  19^2.  Her  entire  estate  was 
left  to  the  brother-in-law. 

Prepare  the  statements  necessary  for  presentation  to  the 
court  in  closing  the  estate  as  of  December  31,  1922. 

Problem  310 

There  are  three  partners  in  a  trading  concern — X,  Y,  and  Z — 
with  equal  amounts  of  invested  capital,  on  which  they  each  draw 
5%  interest.  The  net  profits  of  the  business,  before  charging 
interest,  amounts  to  20%  of  the  entire  capital.  The  net  profits 
after  charging  interest  are  divisible  as  follows :  X,  one-half ;  Y, 
one-third;  and  Z,  one-sixth.  Taking  the  interest  and  net  profits 
together,  prepare  accounts  showing  the  respective  proportion  of 
the  profit  to  be  credited  to  each  partner. 

Problem  311 

It  has  been  said  that  there  are  three  tests  of  the  correctness 
of  an  accounting  entry;  first,  does  it  disturb  the  integrity  of  the 
balance  sheet?  second,  does  it  disturb  the  integrity  of  the  peri- 
odic income  account?  and  third,  does  it  disturb  the  integrity  of 
the  "interior"  classification  of  accounts,  regardless  of  the  ulti- 
mate effect  upon  the  balance  sheet  or  the  income  account?  Com- 
ment upon  each,  explaining  fully. 


I 


170 


PROBLEMS     IN     ACCOUNTING 


In  view  of  your  understanding  of  these  tests,  comment  upon 
the  various  erroneous  practices  of  treating  bond  discount  and 
bond  premium  on  the  books  of  either  the  issuer  or  the  purchaser. 

Problem  312 

A  and  B  are  equal  partners,  and  their  balance  sheet  at  a  cer- 
tain date  was  as  follows: 

Assets  Liabilities 

Machinery  and  Plant... $  6,250  Creditors    $10,000 

Horses  and  Wagons. . .     1,250  A's  capital 15,000 

Furniture 750  B's  capital 15,000 

Stock 18,250 

Debtors  11,500 

Bank 1,500 

Cash 500 


$40,000  $40,000 

They  decide  to  admit  C  and  D,  the  former  to  contribute  $15,- 
000  as  his  capital,  and  the  latter,  in  consideration  of  his  business 
connections,  only  to  bring  in  $10,000,  but  his  capital  account  to  be 
credited  with  the  same  amount  as  C's. 

C  and  D  accept  A  and  B's  balance  sheet  only  with  the  fol- 
lowing corrections : 

Horses  and  wagons  to  be  taken  at $  1,000 

Machinery  and  plant 5,500 

Stock    16,500 

Debtors  to  be  subject  to  5%   discount. 
Creditors  to  be  subject  to  3%  discount. 

Adjust  the  accounts  and  prepare  the  beginning  balance  sheet 
of  the  new  firm. 

Problem  313 

In  examining  a  business  to  determine  and  to  show  separately 
the  profits  for  the  two  years  ending  December  31,  1907,  it  is  found 
that  an  item  amounting  to  $500  had  been  omitted  from  the  inven- 
tory of  December  31,  1905,  that  an  error  had  been  made  in  the 


PROBLEMS     IN    ACCOUNTING 


171 


footing  of  the  inventory  of  December  31,  1906,  by  which  that  in- 
ventory was  overstated  to  the  amount  of  $250 ;  and  that  in  pricing 
the  inventory  of  December  31,  1907,  an  error  was  made  by  which 
that  inventory  was  understated  to  the  amount  of  $1,000.  State 
fully  the  effect  of  these  errors  on  the  profit  of  each  of  the  two 
years. 

Problem  314 

A  manufacturing  concern  having  increased  its  capital  and  in- 
vested considerable  money  in  new  machinery  and  in  the  recon- 
struction of  old  machinery,  removes  to  a  new  location  and  charges 
the  cost  of  moving  and  the  reconstruction  of  the  old  machinery  to 
one  account  termed  "Installation.'*  Explain  fully  how  this  ac- 
count should  be  treated  in  closing  the  books  of  the  company,  and 
give  your  reasons. 

Problem  315 

(a)  Determine  the  average  life  of  the  following  fixed  assets 
belonging  to  the  Western  Hardware  Company : 

Estimated  Estimated  life 
Assets                    Cost                scrap  value        in  years 

Buildings    $100,000  $35,000  20 

Machinery    70,000  25,000  15 

Tools   20,000  5,000  10 

Patterns   10,000  8 

(b)  After  determining  the  average  life  of  the  fixed  assets, 
state  the  amount  of  annual  depreciation  by  the  straight-line 
method. 

Problem  316 

(a)  A  company  with  $500,000  of  common  capital  stock,  par 
value  $100  a  share,  and  a  surplus  account  of  $100,000,  decides  to 
change  its  capitalization  from  a  par  to  a  no-par  basis.  It  there- 
fore calls  in  its  5,000  shares  of  par- value  stock  and  issues  in  place 
thereof  10,000  shares  of  no-par  value  stock.  How  should  the 
transaction  be  recorded?  What  effect,  if  any,  will  the  change  to 
a  no-par- value  basis  have  on  the  surplus  account? 


172 


PROBLEMS     IN     ACCOUNTING 


(b)  Suppose  that  a  new  company  is  organized  with  10,000 
shares  of  no-par-value  stock  and  that  this  new  company  takes  over 
all  the  assets  and  liabilities  of  the  old  company  at  their  book 
value,  issuing  all  of  its  capital  stock  in  payment  therefor.  How 
would  the  transaction  be  recorded  on  the  books  of  the  new  com- 
pany? 

Problem  317 

A,  B,  C  and  D  have  decided  to  dissolve  partnership.  To 
that  end  they  have  liquidated  all  their  liabilities;  and  at  the  date 
of  the  first  division  of  cash  among  the  partners  the  conditions  are 
as  follows: 

Partners              Capital  Loans  Profit  and  loss  ratio 

A $22,000  $  7,000                40% 

B   19,000  6,000                30% 

C   12,000  14,000                20% 

D 7,000  13,000                 10% 


Totals   $60,000 


$40,000 


100% 


Cash  available  for  distribution $20,000 

Other  assets  not  yet  realized   (of  doubtful 
value)   80,000 


Total $100,000 


State  which  partners  should  participate  in  the  distribution  of 
the  $20,000 ;  how  much  cash  each  should  receive ;  whether  the  pay- 
ments should  be  applied  against  the  capital  accounts  or  the  loan 
accounts.  Explain  the  procedure  of  determining  the  distribution. 
Assume  that  none  of  the  partners  has  any  private  property. 

Problem  318 

(a)  The  Buffalo  Forge  Company  has  just  issued  $1,000,000 
5%  First  Mortgage  Bonds.  By  the  terms  of  the  Trust  Agreement 
the  company  is  required  to  set  aside,  out  of  profits,  each  year 


PROBLEMS     IN     ACCOUNTING         173 

$50,000  in  order  to  provide  a  fund  for  the  ultimate  redemption  of 
the  bonds.  At  the  end  of  the  first  year  the  company  uses  $50,000 
of  its  profits  to  purchase  securities  of  other  corporations,  which 
securities  it  turns  over  to  the  Trustee.  Name  the  four  accounts 
which  will  be  affected  and  give  the  journal  entries. 

(b)  At  the  end  of  twenty  years  the  bonds  fall  due.  The 
sinking  fund  assets  are  sold  for  cash  and  the  bonds  retired.  What 
are  the  three  journal  entries  which  should  now  be  made  on  the 
books  of  the  company. 

Problem  319 

A  corporation  charges  all  new  machinery  purchased  to  "New 
Machinery"  account.  This  is  merely  a  suspense  account.  At  the 
end  of  the  year,  a  portion  of  this  account,  equal  to  the  cost  of  old 
machinery  abandoned  during  the  year,  is  credited  out  and  charged 
to  operating  expenses,  as  Replacements.  The  remainder  is  credited 
out  and  charged  to  Machinery — a  property  account. 

In  1913  the  company  issued  bonds  to  the  par  value  of  $1,000,- 
000,  which  sold  at  a  premium  of  12%.  The  following  entries 
were  made: 

Cash   $1,120,000 

To  Bonds $1,000,000 

To  New  Machinery 120,000 

What  is  the  effect  of  these  entries  on  the  balance  sheet? 

Problem  320 

A  manufacturer  makes  extensive  investments  in  stocks  and 
bonds,  buying  and  selling  from  time  to  time  as  the  market  con- 
ditions warrant  and  clearing  all  such  transactions  through  his  reg- 
ular books  of  account.  How  should  such  transactions  be  isolated 
from  his  manufacturing  operations  and  what  books  and  accounts 
should  he  employ  to  record  the  details  of  the  principal  and  income 
from  such  investments  ? 

Problem  321 

How  would  you  proceed  to  ascertain  the  net  sales,  purchases, 
expenses  and  net  profits  of  a  business  for  a  given  period  when  the 


174 


PROBLEMS     IN    ACCOUNTING 


ledgers,  sales  books,  purchase  books  and  supporting  documents 
have  been  destroyed  by  fire,  and  the  only  records  available  are  the 
cash  book,  pass  book  and  book  of  monthly  balances,  the  latter  con- 
taning  all  the  ledger  balances  and  annual  balance  sheets?  (It  is 
to  be  understood  that  no  unusual  transactions  had  taken  place.) 

Problem  322 

In  the  case  of  a  company  which  has  issued  cumulative  pre- 
ferred stock,  but  has  not  earned  enough  to  pay  such  dividends  in 
full  for  several  years,  how  would  you  deal  with  the  arrears  of 
dividends  due,  if  at  all,  on  the  company's  balance  sheet?  Give 
reasons  ? 

Problem  323 

The  machinery  used  by  a  firm  has  been  purchased  on  the  in- 
stallment plan,  with  monthly  payments,  and  under  the  stipulation 
that  the  title  shall  pass  only  when  the  last  payment  has  been  made. 
At  the  close  of  the  fiscal  year  there  are  yet  several  payments  to 
be  made.  The  firm  also  pays  a  royalty  on  the  output  of  some  of 
the  machines  secured  on  this  plan.  How  should  the  auditor  in  his 
annual  statement  deal  with  the  machinery,  the  installments  paid, 
and  the  royalty? 


Problem  324 

On  Dec.  31,  1912,  the  trial 
as  follows: 

Real  Estate $   300,000.00 

Buildings  158,000.00 

Equipment 847,500.00 


50,000.00 

46,474.20 

5,600.14 

3,300.20 


Goodwill  

Cash 

Discount   Allowed 

Interest,  General  . 

Insurance  paid  in 
advance  on  plant         3,030.89 

Accounts  Receiv- 
able        156,028.75 


balance  of  the  M  company  was 

Discount  earned  .$      10,120.52 

Accounts  payable  .        75,871.38 

Depreciation  Re- 
serve   

Common  stock   . . 

Preferred  stock  . . 

Sales   1,371,491.17 

Taxes     accrued 

(est.)    5,300.00 

Bills  Payable 35,000.00 


58,272.00 

1,000,000.00 

500,000.00 


PROBLEMS     IN     ACCOUNTING 


175 


Inventory  of   raw                           Accrued      interest 
material  and                              on  bills  payable.  900.12 

work    in    prog-                           First    Mortgage 
ress     Dec.     31,                               bonds  (4%)    ..      100,000.00 
1911   184,567.39      Surplus  26,520.50 

Operating,  main- 
tenance, manu- 
facturing and 
general  expenses      709,988.65 

Depreciation 25,000.00 

Purchases  691,985.47 

Bond  interest  (one- 
half  year  to  June 
30,  1912) 2,000.00 

Total  $3,183,475.69         Total  $3,183,475.69 

The  inventory  of  raw  materials  and  work  in  progress  on 
Dec.  31,  1912,  is  valued  at  $309,962.05.  Before  the  books  are 
finally  closed  it  is  determined  to  (1)  make  a  reserve  of  one-half 
of  one  per  cent  or  $140,000  of  the  accounts  receivable  to  provide 
for  possible  bad  and  doubtful  accounts;  (2)  add  $1,000  to  the 
taxes  accrued  (estimated)  account;  (3)  carry  to  depreciation  re- 
serve account  a  further  sum  of  $5,000.  Interest  on  bonds  to 
Dec.  31st  is  also  to  be  provided  for. 

It  is  found  that  bona  fide  renewals  of  equipment,  costing 
$17,500,  have  been  charged  to  operating  expenses ;  that  repairs  to 
equipment,  amounting  to  $6,000,  have  been  charged  to  equipment 
account;  that  $1,500,  proceeds  of  old  machinery  sold,  have  been 
credited  to  the  sales  account;  and  that  a  bill  of  $1,560.25  for  raw 
material  received  and  used,  has  not  been  entered  on  the  books. 
These  items  are  to  be  taken  into  account  before  the  books  are 
closed.  Three  per  cent  of  the  net  profits  for  the  year  is  then  to 
be  reserved  for  special  compensation  to  the  management. 

Make  journal  entries  to  give  effect  to  the  various  adjustments 
above  described  and  to  close  the  books,  creating  (1)  a  combined 


176  PROBLEMS     IN     ACCOUNTING 

Manufacturing  and  Trading  Account,  (2)  a  Profit  and  Loss  Ac- 
count and  (3)  a  Balance  Sheet. 

Problem  325 

Is  there  a  reason  why  the  goodwill  carried  as  an  asset  on  the 
books  of  a  prosperous  and  growing  manufacturing  concern  should 
be  depreciated,  amortized  or  otherwise  written  off,  and  if  so  what 
would  be  the  effect  of  such  a  depreciation,  amortization  or  writ- 
ing off? 

Problem  326 

Some  proprietors  keep  a  private  ledger  of  their  business,  to 
which  bookkeepers  and  clerks  have  no  access.  Explain  the  pur- 
pose of  such  a  book,  and  show  what  accounts  it  usually  contains 
and  how  it  is  made  to  agree  with  the  general  ledger. 

Problem  327 

The  bookkeeper  of  a  manufacturing  concern  could  produce 
only  the  following  statement  from  its  records  on  January  1,  1907 : 

Manufacturing  expense $  4,622.89 

Capital  stock  10,000.00 

Plant  and  equipment 17,500.00 

Cash    832.14 

Gross  sales 8,469.10 

First  Mortgage  Bonds  (due  12/31/07). .   15,000.00 

Materials  and  supplies  (inventory) 4,289.34 

Notes  payable   5,000.00 

Accounts  payable   5,423.23 

Interest  on  bonds  (7  mos.)  393.75 

Interest  on  notes  and  accounts  payable..        282.40 

On  January  1,  1907,  the  management  is  changed  and  you  are 
later  retained  as  a  public  accountant  to  conduct  an  examination 
and  prepare  a  balance  sheet  as  of  January  1,  1908. 

You  find  that  during  the  preceding  year  the  directors  have 
subscribed  in  cash  to  $7,500  additional  capital  stock  and  have  re- 
tired all  the  notes  and  accounts  payable  and  that  no  interest  was 


PROBLEMS     IN     ACCOUNTING 


4   I 


paid  on  these  accounts  for  the  year.  You  also  find  that  the  plant 
and  equipment  was  revalued  at  $15,000  and  5%  of  this  amount 
was  charged  oflF  to  provide  for  depreciation,  while  an  additional 
2>^%  was  ordered  placed  in  Reserve  Account  to  cover  repairs 
and  renewals,  the  entire  7>4%  being  charged  directly  to  Profit  and 
Loss.  The  bonds  outstanding  fell  due  on  December  31,  1907, 
and  were  paid,  principal  and  interest,  in  cash. 

An  inventory  of  materials  and  supplies  places  their  value  at 
$2,328.19,  the  practice  being  to  charge  all  purchases  directly  to 
Manufacturing  expense  and  to  credit  back  the  amount  of  the  in- 
ventory. 

The  accounts  payable  (all  for  material  and  non-interest  bear- 
ing) amount  to  $546.28. 

Of  the  accounts  receivable,  January  1,  1907,  $4,968.18  was 
collected  and  the  balance  charged  off  as  uncollectible. 

In  addition  to  the  material  used  from  stock  during  the  year, 
and  the  amount  still  due  for  material  purchased,  the  manufac- 
turing expenses  were  $3,720.52,  all  paid  in  cash,  the  total  manu- 
facturing expenses  being  31%  of  the  gross  sales  for  the  year  end- 
ing January  1,  1908.  Of  these  91.3%  was  collected  in  cash  and 
the  balance,  all  of  which  is  considered  good,  remains  on  the  books 
in  accounts  receivable. 

Produce  a  comparative  balance  sheet  of  January  1,  1907-08, 
and  state  the  amount  of  gross  sales  for  the  year. 

Problem  328 

The  books  of  a  manufacturing  concern,  operating  under  a 
system  of  cost  accounts,  shows  the  following  conditions  at  the 
opening  of  the  fiscal  year:  Raw  materials  in  storeroom,  $15,- 
621.42 ;  factory  pay  roll,  applied  and  distributed  but  not  paid,  2 
days,  $831.78;  partly  manufactured  goods  at  prime  cost,  $63,- 
888.44,  and  the  further  value  of  $8,037.17,  to  cover  factory  bur- 
den, also  $12,074.92  to  cover  management  charges ;  finished  wares 
in  stock  at  total  cost  of  $21,656.01. 


. 


178 


PROBLEMS     IN     ACCOUNTING 


The  financial  operations  during  the  ensuing  year  include: 
Purchase  of  raw  materials,  $80,416.45;  factory  pay  rolls,  $125,- 
793.00 ;  factory  expense,  including  wages  not  applied  to  cost  ac- 
counts, $24,846 ;  management  expenses,  $38,100 ;  interest  paid  on 
loans,  $1,200;  income  from  investments,  $5,004. 

The  manufacturing  operations  during  the  same  year  com- 
prehend: Raw  materials  issued  on  requisition  for  consumption, 
$79,820.34 ;  wages,  applied  and  distributed  to  manufacturing  cost, 
$120,250.40;  and  to  factory  expenses  $5,959.39,  included  in  the 
sum  stated  in  the  preceding  paragraph. 

Finished  goods  transferred  from  factory  to  warerooms,  at 
prime  cost,  covering  materials,  $78,542.58,  and  labor  $118,333.75. 

The  trading  operations  during  the  same  year  comprehend: 
Cost  of  goods  sold,  $251,949.90 ;  proceeds  from  goods  sold,  $302,- 
339.88. 

At  the  close  of  the  year  the  partly  completed  goods  included, 
in  addition  to  prime  cost,  the  further  elements  of  value  to  cover 
factory  and  management  expenses  in  the  amounts  respectively  of 
$8,439.02  and  $12,678.66,  and  the  factory  pay  roll  for  three  days, 
amounting  to  $1,247.67,  which  has  been  applied  and  distributed, 
though  not  due  till  the  close  of  the  current  work. 

The  basis  of  the  apportionment  of  On  Cost  or  Overhead 
Charges  was  as  follows:  Factory  expense,  20%  to  materials  and 
80%  to  labor;  management  expenses,  30%  to  materials  and  70% 
to  labor. 

The  transactions  of  the  previous  year  in  round  amounts  were 
used  in  calculating  the  current  year's  apportionments,  viz :  Mate- 
rials, $75,000;  labor,  $115,000;  factory  expense,  $24,000;  man- 
agement expense,  $36,000. 

Open  the  general  ledger  accounts  that  control  the  cost  ac- 
counts ;  show  the  operation  of  each  and  the  net  profits  resulting ; 
also  calculate  the  percentage  to  be  added  to  each  $1  of  material 
and  of  labor  to  give  the  total  cost. 


PROBLEMS     IN     ACCOUNTING         179 

Problem  329 

A  manufacturer  is  desirous  of  securing  a  partner  and  fur- 
nishes a  statement  covering  five  years'  operations  as  follows: 

Assets  Liabilities 

Buildings  $20,000.00  Accounts  and   Bills 

Machinery  and  Fix-  Payable $  30,000.00 

tures  75,000.00  Sales    average    per 

Invento^  Mdse.  and  year 500,000.00 

SuppRes  50,000.00  Wages  paid  per  year  170,000.00 

Cash 5,000.00  Expense,  Selling  and 

Accounts  Receivable.  40,000.00  General,  per  year    35,000.00 

Material  Purchased.   260,000.00 

Buildings  are  on  leased  ground,  lease  expires  in  ten  years, 
annual  land  rental  $1,000.00.  Buildings  revert  to  owner  at  ex- 
piration of  lease. 

New  machinery  when  installed  ten  years  ago  cost  $50,000.00. 
Additional  since  cost  $25,000.00 ;  no  depreciation  has  been  charged 
off.    All  repairs  and  replacements  charged  to  expense. 

What,  in  your  opinion,  would  be  a  fair  price  to  be  con- 
tributed for  a  half  interest?    Explain  fully. 

Problem  330 

"The  problem  of  the  valuation  of  merchandise  and  materials 
inventories  comes  to  focus  in  the  balance  sheet,  and  is  summed  up 
in  the  question.  On  what  basis  should  pricing  be  accomplished, 
original  cost  or  cost  of  replacement?"  Show  that  this  is  inade- 
quate because  it  fails  to  consider  the  other  statement  of  major 
importance,  that  is,  the  income  statement.  The  importance  of  the 
balance  sheet  as  a  guide  to  economic  conduct  cannot  be  ques- 
tioned, but  there  are  other  figures  in  that  exhibit  besides  asset  bal- 
ances which  can  well  be  misleading,  and  perhaps  in  a  more  fun- 
damental sense.  Explain.  Possibly  the  person  who  wrote  the 
above  quotation  had  in  mind  the  double  aspect  of  the  valuation 
problem,  and  did  not  intdid  to  give  the  idea  that  it  was  the  pricing 
values  of   the  inventories  alone  which   were  significant.     Un- 


-<  •  ♦-▼■ 


!■ 


^11 
« 


180 


PROBLEMS     IN     ACCOUNTING 


doubtedly,  the  problem  of  inventory  valuation  should  be  ap- 
proached from  two  points  of  view,  namely,  that  of  the  manager 
per  se,  and  that  of  the  investor  per  se.  The  former  we  may  define 
as  the  person  who  should  bid  in  an  up-to-date  intelligent  manner 
for  the  maximum  price  obtainable  for  his  product  in  a  given  de- 
mand situation.  In  competition  with  other  managers,  he  must 
have  available  such  current  information  as  will  enable  him  to  do 
this,  wisely  and  effectively.  His  function  is  to  bring  to  his  oper- 
ating unit  the  largest  net  return  possible,  and  he  can  successfully 
perform  that  function  provided  only  he  follows  all  value  changes 
in  productive  factors.  As  a  minimum  requirement,  it  might  be 
said,  the  manager  should  try  to  offset  unfavorable  changes  with 
favorable  changes.  Roughly  speaking,  the  job  of  the  manager 
might  be  said  to  contemplate  a  complete  cycle  of  changes.  This 
does  not  imply,  of  course,  that  the  books  should  necessarily  show 
all  value  changes.  Discuss.  The  point  of  view  of  the  investor, 
looked  at  narrowly  as  the  person  who  assumes  the  burden  of  the 
irregularity  of  business  costs  and  of  business  return,  must  be  also 
carefully  considered  in  connection  with  the  valuation  problem. 
The  investor  is  the  consumer  of  business  income;  that  is,  he  is  in 
position  to  withdraw  from  business  a  sum  of  liquid  assets  which 
purport  to  have  been  a  return  over  and  above  capital.  That  return 
may  be  said  to  have  been  realized  when  invested  capftal  subject 
to  value  fluctuations  normally  incident  to  the  business  process  have 
been  converted  back  into  assets  which  are  not  subject  to  such 
fluctuations,  and  which  are  not  required  economically  to  maintain 
the  investment.  The  test  of  this  realizatibn  may  be  said  to  be  the 
sale,  and  the  basis,  at  least  the  provisional  one,  of  measuring  in- 
come from  the  sale  may  be  said  to  be  the  original  investment  cost 
of  the  sale.  What  bearing  has  all  this  upon  the  problem  of  valu- 
ing inventories?  How  might  one  reconcile  the  demands  of  the 
two  points  of  view,  giving  both  the  information  they  require,  in 
preparing  the  current  balance  sheet  ?    Illustrate  your  points. 


PROBLEMS     IN    ACCOUNTING         181 

Problem  331 

How  would  you  price  inventories  on  the  basis  of  original  cost 
in  the  case  of  a  number  of  shipments  of  merchandise  remaining  on 
hand  which  have  lost  their  original  identity,  for  example,  ten  ship- 
ments of  J4"xlj^"  stove  bolts  shipped  at  ten  different  prices  and 
found  in  one  bin  in  the  store  room? 

Problem  332 

The  following  solution  has  been  offered  for  the  valuation 
problem:  Carry  all  inventories  at  market,  making  a  generous 
reservation  from  surplus  to  absorb  unfavorable  changes.  Com- 
ment. 

Problem  333 

The  problem  just  preceding  brings  this  question  to  the  front: 
Should  the  current  income  figure  be  the  difference  between  orig- 
inal cost  of  sales  and  sales  (not  considering  other  costs),  or  should 
we  allow  its  ups  and  downs  to  be  influenced  by  change  in  the 
"values"  of  unsold  goods  ?    What  is  your  answer. 


Problem  334 

What  application  to  the  problem  of  balance  sheet  valuation 
have  changes  in  the  significance  of  the  dollar?  Would  you  con- 
sider it  the  accountant's  business  to  allow  for  such  changes?  If 
so,  what  would  you  do  upon  having  ascertained  that  the  general 
significance  of  the  dollar  had  dropped  100%  ? 


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Problems  in  accounting 

MAR  i^£jW  ti^  4^ 


ijAN  13  192S 


JAN  i  ^ 

SEP  5     1933 


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